Secondary Sales: Liquidity Without Issuing New Equity

Welcome to 'Understanding Term Sheets', a four-part guide designed for startup founders, early executives, and angel investors. Term sheets are the blueprints of startup financings. They set valuation, economic terms, and governance. Each post in this series stands alone, but together they form a practical playbook for navigating SAFE notes, convertible notes, priced equity rounds, and secondary sales.

In this series, we cover:

  • SAFE Notes – The fast, simple agreement for early-stage funding

  • Convertible Notes – Debt that turns into equity later

  • Priced Equity Rounds – Locking in valuation and ownership

  • Secondary Sales – Selling existing shares for liquidity

Short definition: A secondary sale is the sale of existing shares from one shareholder to another. It provides liquidity for early holders without diluting the company's equity.

Why Founders and Employees Consider Secondary Sales

  • Personal liquidity: founders and early employees can diversify or cover personal expenses

  • Retention: offering liquidity occasionally helps attract and retain talent

  • Investor rebalancing: early investors may sell to realize returns or move capital to other opportunities

Key Components in a Secondary Term Sheet

  • Price per share and how that price was determined (valuation basis)

  • Buyer identity: institutional secondary buyers vs accredited individuals

  • Company consent, Right of First Refusal (ROFR), and co-sale (tag-along) rights

  • Lock-ups and transfer restrictions, especially in anticipation of a liquidity event

Advantages of Secondary Sales

  • Provides immediate liquidity without creating new shares

  • Can help stakeholders diversify personal exposure

  • May improve employee morale if handled transparently

Risks and Pitfalls

  • Signaling: large founder sales can signal lack of confidence to the market

  • Company consent hurdles: many bylaws require company approval or give the company a ROFR

  • Tax and securities-law implications — consult counsel early

Practical Steps to Execute a Secondary Sale

  • Review shareholder agreements and stock purchase agreements for transfer restrictions

  • Confirm company processes for ROFR and co-sale notices; start the process early

  • Negotiate confidentiality and transfer timing to minimize negative signaling

  • Document the economic terms and tax treatment clearly with advisors

Negotiation Tips for Sellers

  • Aim for a clear, market-based price and be prepared to justify it

  • Coordinate timing with the company to avoid triggering restrictive clauses

  • Consider using structured secondaries (escrow, staged closings) to address buyer concerns

Bottom Line

Secondaries give founders and employees liquidity without dilution, but they require coordination with the company, careful tax planning, and sensitivity to market signaling.

📘 Bonus: How to Read Any Term Sheet: A Founder’s Checklist — a one-page guide to spotting key clauses, negotiating effectively, and avoiding common traps.