Ryan ConnerContributorShare on TwitterRyan Conner is a corporate attorney at Atrium part of the General Counsel Group representing early-stage startups.The increase in activity in the pre-IPO secondary market means that founders, early employees, and investors are receiving liquidity much sooner in a company lifecycle than ever before.
For most startups and privately-held companies, liquidity is often an issue for stockholders, as no market exists for selling shares and/or transfer restrictions can prevent their sale.
Secondary stock transactions, however, are a way to work around this problem.Here a quick look at how they work and what to keep in mind, especially if you&re going through the process for the first time.
(If you&re not familiar, secondaries are transactions in which an existing stockholder sells their stock for cash to third parties or back to the company itself before the company undergoes an exit; traditionally, an exit refers to an M-A or an IPO.)Offering secondary transactions to founders is a tool VCs have been using to win deals.
For example, if a VC promises that the founders will receive $1,000,000 in cash through a secondary sale from a $15,000,000 venture financing round, the founders will likely prefer that VC term sheet to a term sheet from a VC that does not offer that deal.Why would a founder consider a secondary sale of their equity?