Secondaries

Whoever owns a company holds shares in it. Such shares can be obtained in two ways. Either the company issues new shares and receives fresh money in its coffers in return. Or someone who already holds shares sells them on to another buyer. This second path is exactly what is called Secondaries. The money flows from the buyer directly to the existing owner, not to the company. For the company, all that changes is who appears on the list of owners.

Why employees and early investors wait for this

Shares in a company that is not publicly traded are hard to sell. There is no marketplace where you can simply offer them. So you can own them and still not be able to live off them. Experts call this problem a lack of liquidity. Secondaries are the usual way out of it.

Two groups are mainly affected. Employees at start-ups are often paid part of their salary in shares. If the company stays private for ten years, they are wealthy on paper but have little in everyday life. Early investors face similar pressure. They manage funds with a fixed term and must eventually pay money back to their own investors.

In the past, an IPO solved this problem. Companies went public after about six to eight years, and everyone could sell. Today, many technology companies stay private twice as long, because they can get enough money from investors even without going public. Secondaries fill this gap. They have become their own market worth billions.

How such a share sale works

Usually the company organizes the sale itself. It determines who is allowed to sell, how much, and at what price. This often takes the form of what is known as a tender offer: a large investor agrees to buy shares at a fixed price, and everyone eligible can submit their shares. If too many are submitted, everyone receives proportionally less. After that, the matter is settled for a year or two.

The price almost always derives from the most recent funding round. If the company was valued there at 30 billion, the secondary price is oriented around that. But it can differ. Buyers sometimes demand a discount because they bear risk and have less information than a major investor. Conversely, for sought-after companies, they also pay a premium.

The distinction from a funding round is important. In a round, new shares are created, the company becomes richer, and the existing owners hold a somewhat smaller percentage. In a secondary, no new shares are created. The pie stays the same size, only the pieces change hands. A common misconception is therefore reading a big secondary headline as fresh capital for the company.

Secondaries in AI industry headlines

In business news, secondaries almost always come up in connection with well-known AI companies. OpenAI, Anthropic, SpaceX, and Stripe are examples of companies that are extremely valuable yet still not traded on the stock market. When a new valuation is mentioned there, sometimes there is no funding round behind it at all, but rather a sale of shares by employees to funds from Japan, the Middle East, or the United States.

Such deals are seen as a sentiment barometer. If the price buyers pay for existing shares rises, confidence in the company grows. If it falls significantly below the last official valuation, that is a warning sign. Journalists watch these prices closely, because private companies otherwise publish hardly any figures.

For retail investors, secondaries are usually not accessible. The minimum amounts are high, and the companies decide for themselves whom they allow as owners. There are platforms and funds that aim to open up access, but the fees are high and the information is thin. Anyone looking at such an investment should above all check one thing: whether the price being asked still has anything to do with the company’s actual value.