Selling on the secondary market
"What?! I don't have to wait for an IPO?!”
*Record scratch*
“This changes everything."
A few years ago, I was surprised to learn that it is possible to sell shares before a company has a financial event like an IPO or acquisition on what’s called the secondary market.
Looking back on the learning curve of understanding how the secondary market works, what to expect, etc. I wish there had been more information for non-founder employees to understand my options better. While my experience was positive, at times, the experience felt nerve wracking— I didn’t know many folks who had been through this process before to ask for advice.
That's why I'm excited to partner up with Gareth da Cunha from V2 Markets to share some common questions folks have about the Secondary Market!
Before we dive in, I’d like to add a note that this post is not sponsored— both Non-Founder Crew and V2 Markets genuinely want more non-founder employees to be in the know on this topic.
With that said, let’s dive in.
the secondary market (Interview)
Gareth
da Cunha,
V2 Markets
Growth & Analysis
Non-Founder Crew: What is the secondary market?
Gareth: In simple terms, the secondary market is a network of buyers and sellers which allows owners of shares in non-public startups (often former employees) to sell their shares to interested investors (usually VCs.)
Non-Founder Crew: Why would someone use the secondary market vs. wait for an exit?
Gareth:Two reasons generally:
The first and most common reason to sell on the secondary market is to accommodate life events. Companies are now waiting 2-3x longer than they used to to IPO according to a paper published by the University of Florida this summer. This can sometimes mean waiting 12+ years before employee equity compensation can be sold on the public market. A lot can change in your life over 12 years! As such employee shareholders will sell shares on the secondary market for things like a house down payments, childcare costs, sending children to college, investment properties, etc.
The second reason is to achieve an investment goal, for example former employees who have the lion’s share of their net worth tied up in a single company have a lot of concentration risk so they will sell off some of their shares and use the proceeds to diversify or pursue other investments.
Remember, your timeline is very different from the timeline of the company.
“Remember, your timeline is very different from the timeline of the company.”
Non-Founder Crew: How does the process of selling on the secondary market work?
Gareth: For sellers, transactions on the secondary market are fundamentally straightforward: find a broker, engage that broker to find a buyer (often involves an intro call), agree on a price once the broker finds a buyer, submit the transaction to the company for approval then transact the shares. Documents you’ll likely be asked to provide are: Shareholder agreement, stock certificate, legal ID.
In all the process can be as quick as a few weeks or can take multiple months depending on the activity in the market, price point and cooperativeness of the company.
Non-Founder Crew: How is the price per share determined?
Gareth: Share price for secondary market transactions is negotiated between the seller and buyer on a one-off basis but is heavily influenced by previous transactions.Unlike trades on the stock exchange where the price is set by the market for everyone, prices in the secondary market are negotiated between the buyer and the seller for every single transaction; this is part of why it’s important to find a broker that will advocate for the best price but still find a way to complete the transaction.
Take note that often the share price that is negotiated in a secondary market transaction is very different from the share price of the last funding round or the internal attitude about the valuation of the company.
Non-Founder Crew: How long does the entire process take?
Gareth: The secondary market transactions can take anywhere from a few weeks to several months, depending on a number of factors such as urgency of the seller, pricing of the deal, size of the deal and recent activity within that company’s performance or stock. We usually see transactions average 4-6 weeks to close once submitted to the company. Also keep in mind that even after the buyer and seller negotiate a price and complete their paperwork the company may deny the transaction.
Non-Founder Crew: Is this open for every company?
Gareth: While every company has shares, not all companies have an active secondary market. Contact a broker and they will be able to give you information about the secondary market of your company, for example we publish a snapshot that shows the recent price range of companies we see a market for. Variables that impact the liquidity of a company's secondary market are: demand for the company, news coverage, cooperation of the board with sellers, concerns of shareholders, etc.
“For most of us this is the largest financial decision of our lives and like all major financial decisions it is wise to seek advice.”
Non-Founder Crew: What do I need to consider when deciding?
Gareth: For most of us this is the largest financial decision of our lives and like all major financial decisions it is wise to seek advice. Everyone's financial situation is different and there are many considerations to keep in mind that you should discuss with your financial professional. Taxation is often one of the primary concerns when transacting on the secondary market and savvy tax decisions can have enormous impact on your net outcome.
Non-Founder Crew: What should I look for in a broker to work with?
Gareth: Transparency! Like any financial transaction it’s important to ask questions and build trust- if your chosen broker is being anything less than forthcoming walk away immediately. I also encourage people to look for communication and helpfulness. Secondary market sales can sometimes get really complicated and the last thing you want is a broker who sends you template emails or shrugs and tells you to call somebody else. We try our hardest to be a centralized place to transact but when we do need outside information or documentation we do our best to set clients up for success and coach where and how to get what’s needed, a lot of brokers don’t do that and I think it’s unfair.
Non-Founder Crew: Is there a catch?
Gareth: Secondary market transactions are much more labor intensive than transactions on the public stock market so there are fees involved- typically starting at around 5% and scaling down from there. Also the company you’re transacting in may charge a fee or require an outside legal opinion as well. Again, it is important to ask questions and be sure you’re working with a broker who is willing to be direct about the benefits and tradeoffs of a transaction.
Another precaution that may be considered a catch is Right of First Refusal (RoFR.) RoFR is a stipulation built into almost all equity compensation plans that allows the company being traded to intervene in the selling of its shares and purchase the shares for the agreed upon price or better. This can be jarring but the conclusion is still beneficial to the seller because they do get to sell at the price agreed upon or better.
The last pitfall we mention is the company's right to cancel a trade entirely. This is a challenge unique to secondary transactions and is one of the central benefits of working with a broker that has an idea of what price the company's board of directors will accept and which buyers they are willing to sell to.
The secondary market can be a life changing opportunity if used correctly and with a reputable broker.
Disclaimer: The content should not be taken as financial advice and is for informational purposes only. Always consultant a licensed financial professional when making investing decisions.
For full disclosure, visit V2Markets.com.