What is a Secondary Sale?
A secondary sale is a private transaction where an existing shareholder sells their shares to another party. Unlike a primary fundraise (where the company issues new shares for capital), secondary sales move existing shares between buyers and sellers. The company receives no new capital from the transaction.
Buyers are typically later-stage venture funds, private equity firms, or specialized secondary market platforms. Sellers are usually founders, early employees, or early investors looking for partial liquidity before an exit event.
Why Secondary Sales Matter
Startups can take 7 to 12 years to reach an IPO or acquisition. Secondary sales give founders and employees a way to convert some equity into cash without waiting for a full exit. This reduces personal financial pressure and can improve retention; employees who can take some chips off the table are less likely to leave for a liquidity event elsewhere.
For investors, secondaries offer a way to enter high-growth companies that are not actively raising a primary round. For sellers, they provide liquidity without forcing the company to raise dilutive capital.
How Secondary Sales Work
Most secondary transactions require company approval. Share transfer restrictions, right of first refusal (ROFR) clauses, and board consent requirements are standard in startup shareholder agreements. The company or existing investors typically get the first opportunity to purchase shares at the proposed price before an outside buyer can proceed.
Pricing is negotiated between buyer and seller, often at a discount to the latest preferred round price. Common stock secondaries typically trade at 10 to 30 percent below the last preferred price per share, reflecting the lack of liquidation preferences and other protections.
When Secondaries Happen
Secondary sales are most common at Series B and beyond, when the company has meaningful traction and outside buyers can underwrite the valuation. They can be structured as one-off transactions or formal tender offers where the company facilitates a broader sale window for multiple shareholders.
Key Considerations
Sellers should understand tax implications before transacting. Shares held over one year typically qualify for long-term capital gains treatment. The sale price establishes a new fair market value reference point, which can affect future 409A valuations and option pricing.
Founders considering a secondary sale should communicate openly with the board. Taking a reasonable amount off the table (typically 10 to 20 percent of holdings) is widely accepted. Selling a majority stake signals a lack of conviction and raises concerns with investors.
Formula
Secondary Sale Proceeds = Shares Sold x Price Per Share
Common Stock Discount = (Preferred Price - Secondary Price) / Preferred Price x 100
Remaining Ownership % = (Original Shares - Shares Sold) / Total Shares Outstanding x 100
Example
A SaaS founder's situation at Series B:
- Founder owns: 4,000,000 common shares
- Latest preferred price: $8.00 per share
- Secondary buyer offers: $6.40 per share (20% discount)
- Founder sells: 400,000 shares (10% of holdings)
Proceeds: 400,000 x $6.40 = $2,560,000 (pre-tax)
The founder retains 3,600,000 shares and gains meaningful personal liquidity without any company dilution. The company's cap table updates to reflect the new shareholder, but total shares outstanding remain unchanged.