Secondary Share Sale
In a secondary share sale, existing shareholders of a private company sell their shares to new buyers — the company itself receives no money from the transaction. These deals are especially relevant in the startup world because they provide liquidity to early investors or employees before the company goes public.
When someone sells shares in a private company — meaning one that is not listed on a stock exchange — to a new buyer, this is called a secondary share sale. The money flows directly from the buyer to the selling shareholder, not to the company itself. The company therefore doesn’t receive a cent; a share simply changes hands. This is the key feature that distinguishes a secondary sale from a regular funding round: in a funding round, the company issues new shares and collects the capital itself.
Liquidity before the IPO
Private companies are being kept private for longer and longer. Twenty years ago, it took an average of four years for a promising startup to go public. Today it’s often ten years or more. That’s a problem for anyone who got in early.
An early investor or an employee holding company shares is sitting on an asset that looks valuable on paper — but that they can’t actually touch. These shares can’t simply be sold like publicly traded stock. Secondary sales offer a way out: they make it possible to exit an illiquid stake without the company itself having to go public or be acquired.
For the buyer, the incentive is different. They gain access to a company that isn’t yet publicly traded — and thus potentially to growth that the market hasn’t priced in yet. Such buyers are often specialized funds that actively seek out these opportunities.
Process and parties involved
Sellers are usually early investors — so-called venture capital funds that, after several years, need to free up capital for their own backers — or employees who want to convert their shares into cash. On the buyer side are often specialized secondary funds, investment banks, or wealthy individual investors.
The price of a share results from negotiation. Since the company isn’t publicly traded, there is no official market price. Buyers therefore often demand a discount relative to the most recently established official company valuation — to compensate for the lack of verified figures and the difficulty of reselling the stake.
The company must generally approve the sale. Many shareholder agreements contain so-called rights of first refusal: the company or other existing investors are allowed to buy the shares on the same terms before they go to an outside party. This step can take weeks and makes secondary sales more cumbersome than simple stock market transactions.
Secondary sales at well-known tech companies
The term regularly comes up in reports about large, not-yet-public tech companies. At OpenAI, the company behind ChatGPT, there have been multiple reports of secondary sales in which employees and early investors sold shares — most recently at valuations exceeding 150 billion US dollars. The same has been true for companies like Stripe or SpaceX, which have been profitable and valuable for years but deliberately forgo an IPO.
For observers of the tech industry, secondary prices serve as an unofficial sentiment gauge. Because no stock market price exists, the price buyers are willing to pay in the secondary market shows how the market currently assesses the company. If this price falls significantly below the last official valuation round, it’s a warning sign.
Secondary sales are therefore not some obscure financial instrument, but a fixed component of the private tech market. Anyone following news about startup valuations will encounter the term more and more often — precisely because the period before an IPO keeps getting longer.