Unlocking Liquidity: A Guide to Founders and Founding Teams Selling Secondaries

In the high-growth world of venture-stage scale-ups, founders often find themselves asset-rich but cash-poor. While the valuation of their companies soars, their personal liquidity remains tied up in equity—the classic "paper millionaire" scenario. Enter the secondary process, a strategic tool that allows founders and early employees to convert a portion of their equity into cash without waiting for an IPO or acquisition.

What is a Secondary Process?

A secondary transaction involves the sale of existing shares from current shareholders—founders, early employees, or even early investors—to new or existing investors. Unlike primary funding rounds, where companies issue new shares to raise capital for business growth, secondaries don't dilute the existing cap table. Instead, they provide liquidity directly to shareholders.

Primary vs. Secondary: Key Differences

In primary funding rounds, the capital raised goes directly to the company in exchange for newly issued shares. This process fuels business growth but dilutes existing shareholders. On the other hand, secondary sales involve the transfer of existing shares from current shareholders to buyers. This means sellers gain liquidity without affecting the company’s cash reserves or altering the ownership structure.

When to Run a Secondary Process

Timing is crucial when considering a secondary sale. Founders typically explore this option during late-stage funding rounds, often Series C and beyond, when valuations are higher, and the company has de-risked significantly. It’s also common in the pre-IPO phase, offering liquidity to founders and early employees before going public. Strategic inflection points—such as major life events like buying a home or supporting family needs—can also trigger the need for personal liquidity.

Process Timeline

Running a secondary transaction usually takes between three to six months. The process begins with securing internal approval, ensuring alignment with the board and key shareholders. Once approval is in place, the next step is identifying potential buyers, which could include existing investors, secondary funds, or strategic partners. This is followed by a due diligence phase, where buyers scrutinize company performance and governance, akin to a primary funding round. After due diligence, the focus shifts to negotiating terms and pricing the shares. The final stage is closing the deal, which involves executing the sale and transferring shares.

Right of First Refusal (ROFR)

Many startups incorporate Right of First Refusal (ROFR) clauses in their shareholder agreements. This provision grants existing investors or key shareholders the right to match any offer made on secondary shares before they are sold to external buyers. Navigating ROFR can add time and complexity to the process, but it ensures that current stakeholders have the opportunity to maintain or increase their positions.

How Pricing of Secondaries is Determined

The pricing of secondary shares is influenced by several factors. The most recent primary funding round typically sets a benchmark valuation. However, company performance—including revenue growth, profitability, and market positioning—plays a critical role in determining the final price. Market demand also impacts pricing; high demand for shares can drive prices up. Despite these factors, secondary shares often trade at a discount to the latest valuation due to liquidity risks and the lack of control typically associated with these transactions.

Discount Ranges in Secondary Sales

Discounts on secondary shares can vary widely based on the company’s stage and market conditions. Late-stage, high-demand companies generally see discounts ranging from five to fifteen percent. Mid-stage companies with moderate demand might experience discounts between fifteen to thirty percent. For early-stage or distressed companies, discounts can exceed thirty percent, reflecting the higher perceived risk.

Information Rights for Secondary Buyers

Buyers in secondary transactions often seek information rights to safeguard their investments. These rights typically include regular updates on company financials, observer rights in board meetings, and protections that ensure participation in future liquidity events. Such rights help buyers mitigate risks associated with investing in non-controlling positions.

Why Secondaries Matter for Founders

Selling secondaries is more than just unlocking cash—it’s about achieving personal and financial balance. Founders dedicate years to building their companies, often sacrificing personal financial stability in the process. A well-timed secondary sale can provide the means to buy a new home, secure a permanent residence for the family, or support significant family needs like education and healthcare. It also allows founders to enjoy the fruits of their labor while continuing to focus on building the company.

I hope you found these perspectives helpful. Let’s discuss your strategy for secondaries, M&A or to raise capital without compromising your future. Book a call today to ensure your equity decisions set you up for success.

Tom C. Schapira
Founder and CEO
Imagine Capital Group
E: [email protected]
Website http://www.imaginecapitalgroup.com

Securities Offered through Wellesley Hills Securities. Member FINRA/SIPC