Definition of secondary market

Definition

A secondary market (or secondary sale, or private sale) transaction is when private company stock is sold to another private party. This is in contrast to primary market transactions, where companies sell directly to investors. Secondary sales are not routine, but they can sometimes occur, such as when an employee sells to an accredited investor who wants to invest in the company.

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Plans and Scenarios › Can you sell private stock?

Definition Shares held by an employee are typically subject to a right of first refusal (ROFR) in favor of the company, meaning the employee can’t sell their shares to a third party without offering to sell their shares to the company first.

caution Private sales generally require the agreement and cooperation of the company, for both contractual and practical reasons. While those who hold private stock may hope or expect they need only find a willing buyer, in practice secondary sales only work out in a few situations.

Unlike a transaction on a public exchange, the buyer and seller of private company stock are not in total control of the sale. There are a few reasons why companies may not support secondary sales:

  • Historically, startups have seen little purpose in letting current employees sell their stock, since they prefer employees hold their stock and work to make it more valuable by improving the value of the company as a whole.
  • Even if employee retention is not a concern, there are reasons private sales may not be in the company’s interest. Former employees and other shareholders often have difficulty initiating secondary transactions with a company. Private buyers may ask for the company’s internal financials in order to estimate the current and future value of its stock; the company may not wish to share this confidential information.
  • Companies must consider whether sales could influence their 409A valuation.
  • Secondary sales are an administrative and legal burden that may not make it to the top of the list of priorities for busy startup CEOs and CFOs.

important However, participation in the secondary market has evolved in recent years and a few options may be possible:

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The Holloway Guide to Equity Compensation
Joshua Levy, Joe Wallin, and over 35 contributors
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