Secondary Sale
A secondary sale is the purchase of existing shares in a private company from early investors, employees, or founders, providing liquidity without issuing new primary capital. Allocators evaluate secondaries because they change liquidity timing, reduce risk, and can materially affect realized returns and incentives.
Secondaries are increasingly important in venture as companies stay private longer. Secondary transactions can provide liquidity to employees and early investors, reduce pressure for premature IPOs, and allow funds to realize DPI earlier. However, secondaries also raise governance questions: pricing, information asymmetry, and incentive alignment.
How allocators define secondary risk drivers
They assess:
- Seller profile: employees, founders, early funds, insiders
- Pricing and information: whether price reflects true risk
- Size and signaling: whether the sale signals weak conviction
- Governance approvals: board consent and transfer restrictions
- Incentive impact: whether founder/employee motivation changes
- Fund-level effects: DPI timing and portfolio concentration shifts
Allocator framing:
“Does this secondary improve liquidity and alignment—or does it introduce adverse selection and signaling risk?”
How secondaries fit into venture portfolios
Allocators see secondaries as:
- a liquidity management tool (DPI smoothing)
- a risk reduction mechanism (partial de-risking)
- an access strategy (buying into known winners at negotiated prices)
What slows allocator decision-making
- lack of transparency on secondary pricing and rationale
- adverse selection risk (sellers know more than buyers)
- governance restrictions and unclear approvals
- secondaries used to mask weak fundamentals
Common misconceptions
- “Secondaries are always negative” → they can be rational risk management.
- “Secondaries are always overpriced” → depends on information and structure.
- “Liquidity is always good” → too much liquidity can reduce commitment.
Key allocator questions
- What is the rationale and what information supports pricing?
- Who is selling and why?
- What approvals are required and what restrictions exist?
- How does this affect incentives and governance?
- How does the GP treat secondaries in reporting and valuation?
Key Takeaways
- Secondaries are now a core venture liquidity pathway
- Transparency on pricing and motivation is critical
- Done correctly, secondaries can improve DPI and reduce risk without harming upside