In the labyrinthine world of private equity and venture capital, the dynamics between startups, their investors, and secondary marketplaces are often as complex as they are delicate. The recent saga involving Figure AI, a robotics startup, and its interactions with secondary market brokers provides a fascinating glimpse into the intricacies and potential pitfalls that can arise when a company's stock becomes a coveted commodity in the private sphere.

Last month, Brett Adcock, the founder of Figure AI, made a bold claim on X, asserting that his company had become the "number one most sought-after private stock in the secondary market." Such a statement would typically be seen as a testament to the company's perceived value and investor enthusiasm. However, the subsequent actions taken by Figure AI have cast a shadow over this seemingly triumphant declaration, revealing a more complicated reality.

According to reports, Figure AI has sent cease-and-desist letters to at least two brokers who operate secondary marketplaces. These letters demanded that the brokers halt the marketing of Figure AI's stock. The timing of these letters is particularly noteworthy, as they were issued shortly after Bloomberg reported in mid-February that Figure AI was seeking a $1.5 billion funding round at a staggering $39.5 billion valuation. This represents a fifteenfold increase from the $2.6 billion valuation the company achieved just a year earlier in February 2024.

A spokesperson for Figure AI provided an explanation, stating that the company sends such letters when it has not authorized the broker to sell its stock. The spokesperson emphasized that this is not a new practice for Figure AI, suggesting that the company has a history of protecting its interests in this manner. "This year, when we discovered an unauthorized third-party broker was marketing Figure shares without approval from the Figure Board of Directors, the company sent a cease and desist asking the unauthorized broker to stop, as it has done previously when other unauthorized brokers were discovered," the spokesperson explained in a written statement. "We do not allow secondary market trading in our shares without board authorization, and the company will continue to protect itself against unwanted third-party brokers in the market."

This stance is understandable, given that Figure AI is a private company, not a publicly traded one. Unlike public companies whose shares can be freely traded on stock exchanges, private companies like Figure AI have significant restrictions on how and when their shares can be sold. These restrictions are in place to protect the company's interests, maintain control over its shareholder base, and ensure that any sale of shares aligns with the company's strategic goals and valuation objectives. The emergence of secondary markets, which offer investors alternative ways to liquidate their holdings before an initial public offering (IPO), is a direct response to these limitations. These markets provide a platform for investors to sell their shares, often through mechanisms such as loans secured by startup shares that become repayable when the company goes public.

However, the actions taken by Figure AI raise several intriguing questions about the motivations behind such cease-and-desist letters. The brokers who received these letters from Figure AI offered their own theories. They suggested that existing shareholders were attempting to sell their stock at prices below the new, ambitious $39.5 billion valuation that Figure AI was seeking. This scenario presents a potential conflict of interest: if secondary market shares are sold at lower prices, they could undermine the company's efforts to secure a higher valuation in its primary funding rounds. In essence, cheaper secondary shares might compete with the new round of funding, making it more challenging for the company to attract investors at the desired valuation.

Sim Desai, the founder and CEO of secondary shares marketplace Hiive, provided further insight into this dynamic. While not commenting specifically on Figure AI's case, Desai noted that companies sometimes block direct secondary sales because they view it as a "zero-sum game." In other words, they believe that any sale of shares in the secondary market detracts from the company's ability to raise funds at a higher valuation in the primary market. Desai, however, argued that the opposite could be true: active secondary market trading could actually attract more interest in primary shares, as it demonstrates investor enthusiasm and liquidity. If secondary market activity fails to drive interest in the primary round, Desai suggested that the issue may lie with the valuation itself. "If someone is having a hard time selling something, it's merely a function of price and valuation rather than availability of capital," he stated.

The situation with Figure AI is further complicated by the company's high-profile partnerships and the scrutiny that comes with them. Recently, Figure AI has been the subject of several news articles detailing its progress with its marquee customer, BMW. In at least one instance, Figure AI has responded by threatening legal action, claiming that the article contained so many inaccuracies that it warranted a lawsuit. This reaction highlights the delicate balance that companies must strike between promoting their achievements and protecting their image and strategic interests.

As Figure AI moves forward, several key questions remain unanswered. How much capital will the company raise in its next funding round, and at what valuation? Will existing investors be permitted to cash out early through secondary transactions, or will the company continue to enforce strict restrictions on share sales? These uncertainties underscore the broader challenges faced by private companies navigating the complex interplay between primary and secondary markets.

The case of Figure AI serves as a cautionary tale for both startups and investors alike. While the allure of a high valuation and investor interest is undeniable, the potential pitfalls of secondary market activity and the need to protect a company's strategic interests cannot be ignored. As the private equity landscape continues to evolve, companies like Figure AI must carefully navigate the delicate balance between maximizing their value and maintaining control over their shareholder base. Only time will tell how this particular saga unfolds, but one thing is certain: the intricate dance between startups, investors, and secondary marketplaces will continue to shape the future of private equity for years to come.