Getting cash out before the exit
A secondary sale is the sale of existing shares from one holder to another, a founder, employee, early investor, or fund, without the company itself issuing new shares or receiving any proceeds. It's the main way anyone gets liquidity in a company that's staying private for 7-10+ years (Lesson 1) rather than waiting for the eventual exit in Lesson 32.
Who sells, and why
| Seller | Typical reason |
|---|---|
| Employees | Diversifying wealth heavily concentrated in one illiquid company |
| Founders | Personal liquidity, often capped by the board to preserve motivation |
| Early investors (funds nearing end of life) | Their fund's own 10-year clock is running out and LPs want distributions |
| New buyers | Later-stage funds gaining exposure to a company that's already de-risked |
Worked example: pricing a secondary
An early employee wants to sell shares from a company last priced at a $200m post-money valuation (Series B). A late-stage fund offers to buy at a discount to that price.
| Value | |
|---|---|
| Last priced round (Series B post-money) | $200m |
| Typical secondary discount | 10-25% below last round |
| Implied secondary valuation | ~$150m-$180m |
| Shares being sold | 0.4% of the company |
| Estimated proceeds to seller | ~$600k-$720k |
The discount exists because secondary buyers take on information disadvantage (they typically get less diligence access than a primary round investor would) and liquidity risk (the shares are just as illiquid after purchase as before).
Why companies restrict secondaries
Most companies require board approval for any secondary sale, both to control who ends up on the cap table and to avoid signaling risk (Lesson 29), a wave of employees or early investors selling can be misread as a lack of confidence, even when the real motive is simple personal diversification.
Checkpoint
- Secondary sale: existing shares change hands; the company itself receives no proceeds.
- Employees, founders, and aging funds are the most common sellers; later-stage funds are common buyers.
- Secondaries typically price at a discount to the last round, reflecting information disadvantage and continued illiquidity.
If anything here still feels unclear, ask before moving to Lesson 32.