Secondary Sales in VC-backed startups: A Primer for Entrepreneurs

Secondaries have become popular for founders, employees and investors (img src: kiplinger.com)

What is a Secondary Sale?

Why secondaries have become popular in Silicon Valley

  1. supply and demand of the company’s stock. When a company is doing well, investors want to get stock in the company, but a startup may not need the financing or not want to dilute its existing shareholders by selling stock, so its stock may be hard to come by.

Who Buys Secondary Shares?

Existing and New Investors.

  • Primary: Investor X and Y will put in $18 million into the company and get new Series C Preferred stock (for 15% of the company)
  • Secondary: Investor X and Y will buy up to $6 million in common stock from existing founders, employees, and investors for another 5% of the company

Matching Websites and Micro Funds

Secondary-specific funds

Private Investors and SPV

Investment banks

What is the Price of Common Stock vs. Preferred Stock?

Figure 1: Value of Common Stock vs. Preferred Stock

A Few Important Considerations and Gotchas

Right of First Refusal.

Right of Co-Sale

Company co-operation, asymmetric information, SEC rules.

Restrictions on Shares.

Founder Series FF Preferred.

Conclusion

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The Simulation Hypothesis, Play Labs @ MIT, Startups/VC, Sci Fi, Bitcoin, Consciousness, Space, Video Games: visit www.zenentrepreneur.com

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Riz Virk

Riz Virk

The Simulation Hypothesis, Play Labs @ MIT, Startups/VC, Sci Fi, Bitcoin, Consciousness, Space, Video Games: visit www.zenentrepreneur.com

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