A secondary sale is one of the few ways to get liquidity from private company stock before an IPO or acquisition, but it’s not automatically available to everyone holding shares. This post covers how secondary sales typically work, what usually needs to happen before you can participate, and what to expect if your company runs one.
What is a secondary sale?
A secondary sale is a transaction where existing shareholders sell shares directly to a buyer, such as an investment fund or other investor, rather than the company issuing new shares. Unlike a primary funding round, where money goes to the company, proceeds from a secondary sale go directly to the selling shareholder. Some secondary sales are company-organized (sometimes structured as tender offers), while others are individually arranged private transactions.
Can I actually sell my shares whenever I want?
Almost certainly not without restrictions. Private company stock typically comes with transfer restrictions written into your option plan and stockholder agreements, most commonly a right of first refusal (ROFR), which lets the company or its investors match any offer and buy the shares themselves before you can sell to an outside buyer. Many companies also require board approval for any transfer of shares, meaning you generally can’t just sell to whoever you find on your own.
Do I need to have exercised my options first?
Generally yes. You typically need to actually own shares, meaning you’ve already exercised your vested options, before you can participate in a secondary sale. Some company-organized secondary transactions include an option for participants to exercise and sell simultaneously, effectively netting out the strike price from the proceeds, but this depends on how the specific transaction is structured.
How does the price get set?
Pricing in a secondary sale is negotiated between the buyer and seller (or set by the company if it’s organizing the transaction), and it’s often, though not always, at a discount to the company’s most recent primary funding round price, reflecting the buyer’s own required rate of return and the illiquidity of private shares. It’s a different number than your 409A valuation, which is set independently for tax purposes rather than for pricing actual transactions.
What role does the company play?
A significant one, in most cases. Beyond the right of first refusal and board approval requirements, many companies actively organize and control secondary sales, deciding which employees are eligible, how many shares each person can sell, and which buyers are approved to participate. Some companies discourage individually arranged secondary sales entirely and only permit selling through company-sponsored events.
Worked example
Say you hold 15,000 exercised shares, and your company is facilitating a secondary sale with a specific institutional buyer at $18 a share, a discount to the company’s last primary round price of $22. Your company’s plan allows employees to sell up to 20% of their vested, exercised shares in this particular transaction.
You’d be eligible to sell up to 3,000 shares (20% of 15,000) for $54,000 before tax, assuming the company approves your participation and the buyer’s offer goes through. The remaining 12,000 shares would stay illiquid until a future opportunity, whether another secondary sale, an acquisition, or an IPO.
FAQ
Do I need the company’s permission to sell my shares? In almost all cases, yes. Standard transfer restrictions like a right of first refusal and board approval requirements mean you generally can’t sell without the company’s involvement.
Can I sell unexercised options in a secondary sale? Generally no. You typically need to own actual shares, meaning you’ve exercised, though some company-organized transactions allow exercising and selling in the same event.
Is the secondary sale price the same as my company’s 409A valuation? No. They’re set independently, for different purposes, and secondary sale prices are often at a discount to the most recent primary funding round.
How often do secondary sales happen? It varies significantly by company. Some later-stage companies organize them periodically as an employee benefit; many companies never offer one before an eventual IPO or acquisition.
What happens to the shares I don’t sell? They remain illiquid, subject to the same transfer restrictions, until your next opportunity, whether that’s a future secondary sale, an acquisition, or an eventual IPO.
What to do next
Whether a secondary sale is happening at your company, and whether you’re eligible to participate, is something to confirm directly with your equity plan administrator or HR, since it’s entirely company-specific. You can model your own numbers for a potential sale at movewealth.io.
MoveWealth is not a broker-dealer, investment adviser, or lender. This is educational content, not financial, tax, or legal advice. Consult a qualified professional about your specific situation.