Dave Thornton, Vested – Could Index Investing Come to Venture Capital? | #447

Episode Summary

Executive Summary: Dave Thornton explains how Vested gives startup employees liquidity for stock options and uses that flow to build a diversified, index-like venture capital product for investors. The conversation covers the startup equity exercise problem, Vested’s sourcing process, why breadth matters in VC, current market dislocations, and the company’s path toward data-driven private-market indexing.

Main Topics: What Vested Does: Vested helps startup employees exercise and monetize stock options, while offering investors single-ticket, diversified access to venture capital through a fund structure. Startup Equity Liquidity Problem: Many employees leave startups with vested options they must exercise within 90 days, but lack cash and often abandon substantial value. Why VC Needs a Diversified Access Vehicle: Thornton argues VC is difficult for individuals to access directly because of high concentration, power-law returns, minimums, and volatility; Vested solves this with many positions and low-friction access. How Vested Sources Deals: Vested identifies ex-employees at VC-backed companies, reaches out via automated LinkedIn/email systems, and purchases part of their exercised shares after funding the exercise and taxes. Market Conditions and Deal Flow: Layoffs and valuation resets at late-stage startups have increased supply, while secondary market activity remains limited and opaque. Future Product Evolution and Data: Vested aims to evolve from a broad VC index-like fund into thematic baskets and eventually a pricing model/benchmark for private companies.

Key Arguments: VC is a valid alternative asset class, but most investors cannot access it efficiently or with acceptable diversification. A single VC fund is often too concentrated; a diversified basket better reflects the asset class’s power-law structure. Vested’s model is effectively an index fund for VC: many small positions, low concentration, and one ticket for investors. The startup employee equity problem is huge and under-served because employees often do not have the cash or expertise to exercise options before expiration. Companies are generally indifferent or favorable to Vested’s transactions because the deals are small and can function as an employee benefit without disrupting 409A processes. The current market environment has increased supply as layoffs and down rounds create more ex-employee liquidity opportunities. Secondary markets are still narrow and opaque, but diversified products could unlock broader participation and liquidity. Data from employee behavior, option exercises, FMVs, and secondary bids can eventually support a pricing model for VC-backed companies.

Data Points: Advisors who think retail should access alternatives: 83% - Referenced from an article cited early in the discussion. Podcast poll result: investors with U.S. stocks: 90% yes - Thornton described his Twitter poll on portfolio holdings. Podcast poll result: investors with ex-U.S. stocks: 80% yes - Same poll on asset-class participation. Podcast poll result: investors in private equity: 85% no - Illustrating low participation in alternatives. Podcast poll result: investors in VC/startups: 80%–82% no - Demonstrating limited VC access among respondents. Last fund size: 196 companies - Thornton said Vested’s last fund had 196 companies. Current fund target deployment: ~1,000 positions at $100 million AUM - He suggested roughly a thousand positions if the fund reaches around $100 million. Fund-two size: $25 million - Vested’s first scaled fund was described as fund two. Fund-two deployment time: Less than 4.5 months - Thornton said they expected 6–9 months but deployed faster. Startup market capitalization estimate: $4 trillion - Estimated total capitalization of U.S.-headquartered VC/VC-backed companies. Employee-owned share of startup value: 30% - Thornton estimated employees own about 30% of that capitalization. Estimated employee-owned value: $1.2 trillion - 30% of $4 trillion as the employee-held portion. Abandoned option estimate: 50%+ - He said no less than half of options go abandoned. Estimated abandoned value: $600 billion - Half of the employee-held value, used to illustrate scale. Typical exercise window: 90 days - Employees usually have 90 days after departure to exercise vested options. Qualified Small Business Stock benefit: First $10 million in gains - He cited QSBS as a reason some employees may exercise earlier. Team size: 15 - Headcount at Vested during the discussion. Maximum per-company exposure mentioned: No more than $250,000 - He described current bite-size limits on any one company. Secondary market scale: Billions trading vs. trillions notional - He contrasted actual secondary trading volume with the total notional universe.

Pivotal Quotes: "“Vested is an easy way to access VC.”" — Dave Thornton: His concise definition of the core investor product. "“Do not leave your unvested options on the table if you can find free money. Just don't do it.”" — Dave Thornton: Advice to startup employees considering whether to fund option exercises. "“We’re basically tracking the median return of the VC asset class, juiced by a discount that we’re buying.”" — Dave Thornton: Explaining the economics behind Vested’s diversified acquisition strategy.

Implications: Vested points toward a more index-like, data-driven private markets future where VC is easier to access, employees can unlock stranded equity, and diversified products may become benchmarks for private-company pricing and performance.