Introducing the Aption

We like to talk about the paradox of success: With success comes over exposure. No doubt, it’s an enviable position to be in. You may have worked the midnight oil for years with enough dedication and something clicked. Your company has got traction and success and your equity is suddenly worth something. And with the success you have a new problem. Your valuable equity, which may now be 50% or even 95% of your net worth, is not only illiquid; it’s in one of the most risky and volatile asset classes on the planet.. You may need to sit with this equity position for upwards of a decade, hoping that bad luck, the fast-paced tech environment, or misalignment with other company stakeholders doesn’t derail what could be a life-changing exit

The problem of overexposure is common amongst founders, executives and early employees. But its also common for GPs (managers of VC funds) and LPs (investors in VC funds).

Realizing a valuable equity position involves unreasonable and sustained periods of risk.

The founder or employee of a successful company that has raised a series B or series C still has a lot of risk in their company. They may have 90+% of their net wealth in their startup, yet ten years into their startup, they still have a 50-70% risk that they never see a meaningful exit. At earlier stages, this risk for venture-backed companies can be as high as 90%. In fact, picking a great startup at any stage is really hard because there are so many unpredictable factors. And this sustained illiquidity leaves founders and employees with a big problem.

Now, imagine you’re a GP. Your fund is in its 14th year and you’ve been lucky enough to back two winners. These two companies should take the fund to a place of respectable returns. And your carry is worth millions of dollars. But this carry is also in the most illiquid,t risky, and volatile asset class on the planet. It’s 80% of your net wealth and there is little you can do about it.

Imagine you’re an LP. You invested in four VCs. Three were average to poor, yet the fourth picked some real winners. In fact, let’s say it’s the same fund we mentioned above. Your stake is worth tens of millions of dollars and it is all in two companies. And perhaps mainly in one. This stake, which is illiquid and in the most risky and volatile asset class on the planet, is now worth a lot. 18% of your ~$100M+ portfolio. In one asset. And yet because you don’t own a direct stake, and because it is illiquid – you can’t do anything about it. This is why three quarters of family offices highlight illiquidity as a significant barrier to investing in private markets.

We realized that the venture world needed new sophisticated instruments. It needed derivatives. And with these derivatives you could do things like equity pooling. This is a financial instrument consisting of a number of derivative positions in a basket of companies. Using an equity pool you could swap part of a concentrated position for a diversified position. We had created these new and very-useful financial instruments, but they needed a name.

That name is Aption. It’s both a noun and a verb.

Definition:

Ap·tion

/ˈapSHən/

noun

1. A derivative instrument typically used to hedge private equity positions

“he diversified his founder equity using an aption”

verb

1. To diversify or hedge a private equity position

“he aptioned his founder equity in order to protect his wealth”

We believe that the aption is an important innovation in the world of private and venture. It is good for operators, companies and investors. We believe that it is a social good and a basic right.

aptions introduce sophisticated private markets derivatives

Aptions open up new opportunities in the world of HR and compensation

We’ve already covered why aptions are good for operators, GPs, and LPs. They allow people with an extremely concentrated venture position to make a personal diversification decision. They can now aption part of their holding and diversify into other positions. This reduces risk and volatility. It also improves liquidity as the diversified basket will have multiple liquidity events spread over time. Not just one.

But aptions are also great for companies.

Companies issue options, to compete with big public companies that supplement their salary packages with RSUs. But if these options are illiquid for over a decade, the real value of these options gets discounted to close to zero. In fact, a Mercer study showed that private stock options were a negative incentive after around 2 years tenure, exactly for this reason. A study by Texas University showed that the amount of risk borne by option holders resulted in incentive misalignment and that overall, stock options were a bad idea.

Developers in Silicon Valley bounce from company to company every year and a half to build their portfolio. Aptions allows those same employees and founders to realize value in that stock to build a portfolio, without moving companies. That improves employee retention and helps startups to win new talent. And all this whilst keeping the cap table “clean”.

And what is good for companies is good for investors. Company-level aption plans are a force multiplier on the equity being granted . Once aptions are in use, they open up a treasure trove of more sophisticated and otherwise-inaccessible transactions for investors.