How To Efficiently Navigate A Founder-Friendly Secondary Stock Sale

How would you navigate a founder-friendly secondary stock sale? How would you ensure that your workforce, investors, and other stakeholders also benefit from the transaction? Most importantly, you’ll address the legal ramifications, ensure accurate valuation, and streamline execution.

Secondary share sales are an excellent pathway to withdraw some liquidity from the company once it is well established. Founders and other stakeholders can use the funds to meet personal and other goals. At the same time, new investors get the opportunity to participate in owning a viable company.

Secondary stock sales, or secondaries, as they are also called, also help free up cash for scaling the company. However, when a company announces a secondary offering, that does not necessarily mean it is unlikely to raise capital. Or that it will not go to an initial public offering (IPO).

Instead, this transaction is often viewed as a win-win for all parties involved. The company sells shares to new investors; however, it does not issue new stock. Founders, team members with option pools, and investors offer a portion of their stakes to new investors.

The multiple advantages of secondary sales have driven year-over-year growth in the funding companies are raising using this strategy. In 2023, they raised a record $93.8B, which was an incredible 159% increase from the previous year. In 2025, this figure is an estimated $210B.

Secondaries are specific to private companies only. Once they go public, their shares are available for trading on open markets such as the NASDAQ. If you’re considering a stock sale, you’ll structure it according to Rule 144 of the U.S. Securities and Exchange Commission (SEC) regulations.

Read ahead to understand in detail how the process works.

Entities Involved in a Secondary Stock Sale

The Company

The most crucial factor to understand about navigating a founder-friendly secondary stock sale is that the cap table remains unchanged. New capital does not enter the company; only the ownership structure changes hands.

Accordingly, the founders, team members with tock options, and early investors may choose to sell some of their shares. These entities own primary stock and may want to liquidate some of them without waiting for a merger or acquisition. Or, for the company to go public.

Although the company is not directly involved in the sale, it can exercise its estimated $210B. This provision, typically triggered during a secondary stock sale, enables the company to approve or prevent investors from selling equity.

If investors want to sell their shares, they must offer them to existing shareholders with ROFR. Only then can they sell them to third parties. These provisions are crucial for company owners to protect their stake from hostile takeover bids.

Existing Share Owners Selling Their Stake

Existing shareholders and early-stage investors may be interested in selling a portion of their stake for various reasons. Securing some liquidity and financial returns once the company is stable and has reached a later growth stage are good reasons.

As the company founder, you could be interested in a new project. The capital you’ll raise from selling some stock could help kickstart the new startup. More companies are choosing to remain private for more extended periods and are in no hurry to go public.

They simply roll their revenues back into operations and avoid the need to raise further funding rounds. In that case, a secondary stock sale could be a great opportunity. You can use the funds to scale the company without a funding round, which involves ceding ownership and voting rights.

Employees may also sell some of their shares for personal reasons, such as improving their lifestyle or addressing medical emergencies. Or even meeting family commitments.

Interested Investors

When organizing a founder-friendly secondary stock sale, you’ll target later-stage investors interested in getting in on the company. These investors typically look for stable, successful projects to back, and include investment bankers and family offices.

Venture capital funds and private equity firms typically have a fixed investment horizon of around 10 years. As they near the end of their lifecycle, they seek shorter investments. They prefer to invest in companies that are likely to go public or be acquired within three to four years.

Accordingly, these investors look for exceptionally viable companies that can deliver strong returns within this period. Then there are some investors who have long recognized the company’s potential. But were unable to invest because they missed participating in oversubscribed rounds.

A secondary share sale is their solution to grab stock and earn significant profits. Since the company has demonstrated impressive revenue and robust valuation, it is a safer bet for investors. Particularly if it is a proven unicorn.

Keep in mind that storytelling is everything in fundraising. In this regard, for a winning pitch deck to help you here, take a look at the template created by Peter Thiel, Silicon Valley legend (see it here), that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that founders worldwide are using to raise millions below.

How to Organize a Founder-Friendly Secondary Stock Sale

Although a secondary stock sale offers advantages for all the concerned stakeholders, it also entails legal complexities. Retaining an expert legal team and fundraising consultant is always advisable to guide you through the process. You’ll secure the company’s interests while avoiding conflicts.

Step 1 – Identifying Secondaries for Sale

You’ll initiate the process when any stakeholder expresses interest in liquidating some of their stock. You’ll start by analyzing the impact of the sale on the company’s cap table, ownership structure, and operations. Also, ensure that the sale aligns with the company’s long-term goals.

Don’t forget to consider how the sale can impact the company’s stability and operations once new investors enter the mix. The control and voting rights that the investors can exercise are significant risks, for which you should prepare.

Do keep in mind that the company may restrict shareholders from executing a secondary sale. When organizing the process, you’ll identify the non-restricted securities that the SEC permits companies to sell. Here’s what you need to know, as specified on the SEC website:

Some examples of restricted securities include securities acquired in:

• Private placement offerings (Section 4(a)(2) and Rule 506(b))
• Rule 506(c) general solicitation offerings
• Certain Rule 504 limited offerings
• Certain employee benefit plans (Rule 701)
• Offshore transaction (Regulation S)
• Resales under Section 4(a)(7)
• Resales by an affiliate or control person of the issuer (Rule 144)
• Resales to a qualified institutional buyer (Rule 144A)

Some examples of securities that are not deemed “restricted” include securities acquired in:

• Regulation A offerings
• Regulation Crowdfunding offerings (after 12 months)
• Intrastate offerings (generally, after 6 months)
• Resales under Section 4(a)(1)
• Resales by a holder that is not an affiliate or control person of the issuer (Rule 144)

Step 2 – Valuing the Secondary Stock and Setting Its Pricing

Having made the decision for a founder-friendly secondary stock sale, the next step involves pricing the stock. For that to happen, you’ll determine the company’s valuation using one of the various methods. Given that your company is later-stage, you’ll use quantitative, data-driven approaches.

As your fundraising consultant will advise, you’ll use techniques such as the Discounted Cash Flow (DCF) Method and market-based methods. Also, use the Comparable Company Analysis (CCA), the Precedent Transactions Analysis (PTA), and the Asset-Based Approach.

Remember to use a blend of different methods to arrive at an accurate and defensible number. If you haven’t raised a funding round in the last 12 months, this is a good time to conduct a new valuation. The number you arrive at will serve as the basis for determining the stock’s price.

Buyers and sellers are likely to negotiate the final price based on various considerations, such as the company’s financial health. You’ll also factor in its growth potential, macroeconomic conditions, cash flows, and the risks comparable companies in the sector face.

A crucial aspect of selling founder-owned shares is knowing how to build a target list of investors who might be interested in buying the shares. Check out this video in which I have explained how it’s done.

Step 3 – Organizing the Documentation with Legal Compliance

When executing the sale, you’ll comply with the SEC’s legal requirements and the securities rules applicable in each jurisdiction. With your legal counsel’s assistance, you’ll prepare the relevant papers and documentation to ensure the transaction proceeds seamlessly.

You’ll ensure the deal proceeds in compliance with the rules and clauses laid down in the shareholder agreements. Ensure that all the buyers and sellers understand their rights and obligations. Don’t forget that you can exercise the right to purchase the shares and retain them within the company.

Once the deal is finalized, you’ll register the secondary stock sale as specified by state securities laws. Do keep in mind that regulators have the “authority to investigate and bring enforcement actions for fraud, impose state notice filing requirements, and collect state fees.”

Step 4 – Executing the Sale and Transferring Assets

Once the valuation and pricing are complete, the transaction progresses to the next step in organizing a founder-friendly secondary stock sale. It typically involves extensive administrative paperwork, and company officials facilitate the transfer documentation process.

In addition to managing the paperwork, the company must update its internal records and the cap table. The new table must reflect the change in ownership and include information about the new shareholders. Buyers usually wire the funds to an escrow account monitored by the company.

Once the sellers confirm receipt of payment, the company completes the share transfer.

Step 5 – Completing Administrative Tasks

The company updates its records to define the ownership and percentage structure for complete transparency. The accountants and tax consultants now step in to determine the transaction’s tax implications. Sellers may be liable for capital gains tax, and the company informs them accordingly.

Buyers receive detailed information about the tax implications of owning a private company’s shares. If an employee chooses to sell their stock, they’ll work with the human resources department to complete the formalities. They’ll also need guidance about their tax obligations and reporting.

Benefits of a Secondary Stock Sale for Founders

A secondary stock sale offers many benefits for founders, given that most invest substantial personal funds in building the company. Here’s how:

• Considering that more startups prefer to remain private for an extended time, this means locking in liquidity for that duration. A secondary sale allows you to regain some liquidity and realize financial gains from the company you built.
• At the same time, you need not relinquish ownership or control, or prematurely push the company through an initial public offering.
• The risk of dilution is low because you can structure a founder-friendly secondary stock sale that protects your interests.
• As for pricing, it entirely depends on the demand for your company’s shares in the open market.
• Most importantly, such sales are SEBI-regulated and subject to strict rules, adding an extra layer of protection for both you and the company.
• You can organize the transaction internally by vetting prospective buyers and valuing the company. Management oversees the change of ownership, ensuring full transparency.
• You can use the funds to reinvest in the company to scale further or pursue new, viable projects.
• With the company now stable, you gain the bandwidth and capital to explore other options, including personal growth, lifestyle improvements, or other commitments.

Key Considerations

Organizing a founder-friendly secondary stock sale involves careful planning, vetting investors, and navigating administrative tasks. You’ll also conduct negotiations, enable investor due diligence, and determine the appropriate share prices. Managing the different steps requires attention to detail.

You can streamline the process by having clear policies outlined in the articles of incorporation and shareholder agreement. Ensure that the shareholders, existing investors, and employees are aware of the guidelines for selling their shares.

Ensure you’ve included the necessary provisions and clauses to protect the company from hostile takeovers and unforeseen risks. Most importantly, you must secure the company from malicious third parties seeking to gain entry through a secondary stock purchase.

Clearly defining the clauses will also prevent disagreements and conflicts among stakeholders. Some may welcome the stock sale, while others may oppose it. Your objective is to protect the company from instability and secure its long-term success and profitability.

The Takeaway!

A secondary stock sale is an excellent solution for founders, employees, and other stakeholders to divest ownership stakes and access liquidity. Take your time organizing the process to secure their interests–above all, secure the company.

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