Secondary Sales: When Founders Should Take Money Off the Table
Your net worth is tied up in illiquid equity. Secondary sales let you convert some of that paper wealth into real money. Here's when it makes sense and how to do it right.
What is a Secondary Sale?
A secondary sale is when existing shareholders sell their shares to other investors. Unlike primary funding (where the company issues new shares), secondary transactions don't provide capital to the company—the money goes to the selling shareholder. It's a key tool in any founder personal finance strategy.
Types of Secondary Transactions
Structured Secondary
Part of a funding round where investors buy some shares from existing holders. Often 10-20% of the round.
Tender Offer
Company-facilitated program allowing shareholders to sell shares. Common at later stages.
Direct Secondary
Founder finds buyer directly (often existing or new investor). Requires company approval.
Secondary Marketplace
Platforms like Forge, EquityZen connect sellers with buyers. Typically for larger, later-stage companies.
Why It's Become Common
Companies stay private longer. The average time to IPO is now 10+ years. Secondary markets provide liquidity that founders and early employees need while companies remain private.
When to Sell
The decision to sell secondary is personal. There's no universally right answer, but certain situations warrant serious consideration.
Good Reasons to Sell
Less Good Reasons
How Much to Sell
| Amount | Typical Use |
|---|---|
| 5-10% of holdings | Creates financial cushion, minimal impact on upside |
| 10-20% of holdings | Meaningful diversification, still aligned with upside |
| >20% of holdings | Significant de-risking, may signal lack of confidence |
How It Works
The Process
1. Company Approval
Most companies have Right of First Refusal (ROFR) and board approval requirements. You can't sell without company consent. Start by discussing with your board.
2. Find a Buyer
Often an existing investor or new investor in the round. Sometimes company facilitates. Secondary platforms work for later-stage companies.
3. Negotiate Price
Secondary prices often discount to the most recent funding round (10-30% typical for private secondaries). Supply/demand and company performance affect pricing.
4. Execute Transaction
Legal documentation, share transfer, payment. Company updates cap table. Process typically takes 2-4 weeks once buyer is found.
Pricing Reality
Don't expect to sell at the latest headline valuation. Buyers discount for illiquidity, information asymmetry, and lack of control. Expect 15-30% below the most recent round, sometimes more.
Key Considerations
Investor Perception
Investors watch founder secondaries closely. Some amount is expected and healthy. Too much signals lack of conviction.
Generally Acceptable
- 10-20% of holdings at Series C+
- Stated life-event reasons
- Selling alongside other insiders
- Transparent communication with board
Raises Questions
- Large sales early in company life
- Selling more than investors are buying
- Repeated sales each round
- Secretive or non-disclosed sales
Tax Implications
- Long-term vs. short-term: Hold shares for >1 year for long-term capital gains rates.
- QSBS consideration: Secondary sales can impact QSBS qualification. Get tax advice before selling.
- State taxes: State residency at sale matters. Some states have no capital gains tax.
- AMT impact: If you exercised ISOs, secondary sales have AMT implications.
Considering a Secondary Sale?
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