How secondary sales work, when to consider selling shares before an exit, and what every founder needs to know about liquidity mechanics in 2025.
Most startup advice focuses on building toward an exit. Nobody talks much about what happens in the decade before that exit — when you’ve built something real, your net worth is entirely illiquid, and you’re being asked to take risk every single day with no safety net.
Secondary sales exist to solve exactly that problem. And in 2025, the secondary market has matured to the point where founder liquidity is no longer a taboo topic in VC conversations — it’s a routine part of late-stage fundraising.
Table of Contents
- What Secondary Sales Actually Are
- Types of Secondary Transactions
- When Founder Liquidity Makes Sense
- How Secondary Sales Work Mechanically
- Investor Reactions: What VCs Think About Founder Secondaries
- Tax Implications and Structuring Considerations
- Frequently Asked Questions
What Secondary Sales Actually Are
A secondary sale is any transaction where existing shareholders — founders, early employees, or early investors — sell shares to a new buyer rather than the company issuing new shares. In a primary round, the company receives the capital. In a secondary, the selling shareholder receives the capital and the company sees no new money.
Secondary transactions can happen in isolation or alongside a primary raise. A Series B round might include $30M in primary investment (new shares, cash to the company) plus $5M in secondary (existing shareholders selling to new investors). The cap table changes — ownership percentages shift — but the company’s cash position only increases by the primary component.
The secondary market has grown dramatically since 2022. With the IPO window partially closed and average time-to-exit stretching past 10 years for venture-backed companies, both founders and early investors have needed alternative liquidity mechanisms. Total secondary transaction volume exceeded $130B globally in 2024, up from $108B in 2023.
Types of Secondary Transactions
| Transaction Type | Who Sells | Who Buys | Typical Context |
|---|---|---|---|
| Founder liquidity | Founding team | New or existing investors | Late-stage primary rounds |
| Tender offer | Employees, early shareholders | Company or lead investor | Late-stage, pre-IPO |
| Direct secondary | Early investors | Secondary funds or new VCs | Fund lifecycle management |
| Structured liquidity | Mixed seller group | Dedicated secondary funds | GP-led secondaries |
| Crowdfunded secondary | Employees/founders | Retail or institutional | Via platforms (Forge, Carta) |
Founder liquidity is the most emotionally charged of these. It’s also, increasingly, the most common. Major late-stage rounds at companies like Stripe, SpaceX, and Databricks have routinely included founder secondary components — normalizing the idea that founders can take chips off the table without signaling a lack of conviction in the company.
When Founder Liquidity Makes Sense
There’s no universal answer, but there are clear situations where taking secondary liquidity is rational:
It makes sense when:
- You’ve been building for 5+ years and have meaningful unrealized value on paper
- A primary round is happening at a strong valuation and investors are open to including a secondary component
- The amount you’re taking off the table is modest relative to your total stake (10–20% of your holding is the typical guideline)
- You have personal financial obligations — mortgage, family, debt — that create real psychological pressure on your daily decision-making
- Your company is profitable or near-profitable and the liquidity doesn’t send a negative signal
It doesn’t make sense when:
- You’re selling more than 20–30% of your stake, which signals to future investors that you’re de-risking significantly
- The company is in a critical growth phase where founder conviction signals matter to the next round
- The valuation is artificially inflated and you’re aware of underlying business problems
- Investors haven’t been consulted and the transaction creates governance friction
The mental health argument for moderate founder liquidity is real and underrated. Founders who have taken some cash off the table consistently report making better long-term decisions because they’re no longer operating from a position of financial desperation.
How Secondary Sales Work Mechanically
The mechanics depend on the company’s shareholder agreement and any rights of first refusal (ROFR) that exist:
- Founder identifies a buyer — either a new investor participating in a primary round, an existing investor exercising pro-rata, or a dedicated secondary fund
- ROFR process — most shareholder agreements give existing investors the right to buy shares before any third party. The company or lead investor typically has 30–60 days to exercise this right
- Board and investor approval — most secondary transactions require board approval. Some require majority shareholder consent. Check your specific SHA
- Valuation agreement — in a clean primary+secondary round, the secondary price matches the primary price. In standalone secondaries, price is negotiated, often at a discount to the last primary round
- Transfer documentation — share transfer agreement, updated cap table, and filing with the relevant corporate registry
- Tax filing — capital gains are typically triggered at the point of sale (see tax section below)
The entire process can take 2–6 weeks if documentation is clean and all parties are aligned. It can take 3–6 months if the shareholder agreement has complex provisions or if there are many small shareholders with ROFR rights.
Platforms like Forge Global, Nasdaq Private Market, and Carta’s secondary marketplace have built infrastructure to make this process faster and more standardized, particularly for later-stage companies with recognized valuations.
Investor Reactions: What VCs Think About Founder Secondaries
The conversation around founder liquidity has shifted meaningfully in the last five years. Most top-tier VCs now accept — and in some cases proactively offer — secondary components in large rounds, for several reasons:
- A founder who has personally de-risked is less likely to accept a mediocre acquisition offer to achieve personal liquidity
- It keeps exceptional founders from leaving to start a new company just to generate income
- It creates alignment between founder and investor holding periods
The typical VC guideline: a founder taking 10–15% of their stake as secondary in a late-stage round is fine. Taking 30–40% raises questions. Taking a majority of their stake is a serious red flag that will likely affect the company’s ability to raise future rounds.
Some investors will push back on any secondary at early stages (pre-Series B), arguing that founders should remain fully aligned. This is a negotiating position, not a hard rule. If the amount is modest and the company’s fundamentals are strong, early secondary is increasingly negotiable even at Series A.
In 2025, secondary market activity has become a practical “release valve” for the entire venture ecosystem, with GP-led secondaries and structured liquidity programs creating options that didn’t exist even five years ago.
Tax Implications and Structuring Considerations
Tax treatment of secondary sales varies significantly by jurisdiction, but the core principle is consistent: you’re selling shares, which typically triggers capital gains tax on the difference between your cost basis and the sale price.
| Jurisdiction | Capital Gains Rate (approx.) | Key Consideration |
|---|---|---|
| USA | 20% (long-term) / up to 37% (short-term) | QSBS exemption can eliminate federal tax on up to $10M gain |
| UK | 10–20% (Business Asset Disposal Relief may apply) | BADR reduces rate to 10% for qualifying shares up to £1M lifetime |
| Germany | 26.375% flat | Holding period and structure matter |
| France | 30% flat (PFU) | Founder-specific relief available under certain conditions |
| Italy | 26% flat | Participation exemption rules apply for qualifying holdings |
The QSBS (Qualified Small Business Stock) exemption in the US is one of the most valuable tax benefits available to startup founders and early employees. If your company qualifies and you’ve held shares for 5+ years, you may be able to exclude up to $10M in gains from federal income tax entirely. Always verify current rules with a qualified tax attorney.
In the UK, Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) can reduce your effective rate to 10% on qualifying gains up to £1M lifetime — a meaningful benefit for early exits or partial secondaries. Structuring the sale correctly before the transaction closes is essential; retroactive tax planning rarely works.
Suggested Visuals
- Graphic 1: Cap table waterfall showing how a $5M founder secondary alongside a $30M Series B affects ownership percentages
- Graphic 2: Timeline of a typical secondary transaction from initiation to closing
- Graphic 3: Comparison matrix — tender offer vs. direct secondary vs. structured liquidity by use case, timeline, and complexity
Frequently Asked Questions About Secondary Sales and Founder Liquidity
Can a founder sell shares before the company exits or goes public?
Yes. Secondary sales allow founders to sell existing shares to new or existing investors without the company raising primary capital. This is increasingly common in late-stage rounds (Series B and beyond) and through dedicated secondary platforms like Forge Global and Nasdaq Private Market.
How much of my stake can I sell in a secondary without alarming investors?
The general guideline is 10–20% of your total holding. Taking more than 30% raises significant red flags for future investors, who may interpret large secondary sales as the founder reducing exposure to downside risk — which signals reduced confidence in the company’s trajectory.
Do I need investor approval to sell my shares?
Almost certainly yes. Most shareholder agreements include Rights of First Refusal (ROFR), which give existing investors the right to purchase your shares before you sell to a third party. Board approval is also typically required. Review your SHA carefully before initiating any secondary process.
What is a tender offer and how is it different from a direct secondary?
A tender offer is a company-organized process where employees and shareholders are invited to sell shares at a set price to a specific buyer — typically the lead investor in a new round or the company itself. A direct secondary is a bilateral transaction between a selling shareholder and a buyer, negotiated independently. Tender offers are more organized but less flexible; direct secondaries offer more pricing negotiation.
How is the price determined in a secondary transaction?
In a combined primary and secondary round, the secondary price typically matches the primary price per share. In a standalone secondary (no concurrent primary), price is negotiated between buyer and seller and often reflects a discount to the last primary valuation — typically 10–30% depending on company performance and market conditions.
Are secondary sales taxable events?
Yes. Selling shares in a secondary transaction is a taxable event that triggers capital gains tax on the difference between your sale price and your original cost basis. Tax rates and exemptions vary significantly by jurisdiction. In the US, QSBS exemption can eliminate federal tax on up to $10M in gains for qualifying shares held 5+ years. Always consult a tax attorney before executing a secondary.
