Founder Liquidity in Growth Rounds Explained
After years of low salaries and personal risk, many founders reach a growth round and wonder whether they can finally take a little money off the table. That is founder liquidity: selling a small part of your existing shares as part of a funding round. This explainer covers how it works, who has to approve it, how it can affect your company, and how to raise the topic with investors without sending the wrong signal.
Key takeaways
- Founder liquidity usually means a secondary sale: you sell some of your existing shares to an investor, and the money goes to you rather than the company.
- Secondary sales in growth rounds usually need board and investor approval, and may affect the company's 409A valuation.
- Investors are more comfortable when the amount is modest, the reason is clear and the founder stays heavily invested.
- Taxes, transfer restrictions and the effect on employees all need planning with a lawyer and a tax adviser before you agree terms.
For years, the common advice was that founders should never sell before an exit. That view has softened. Many growth investors now accept that a founder who has paid off personal debt or bought a home is often more focused, not less. Still, a secondary sale is a real transaction with real consequences for your cap table, your employees' options and your own taxes. It deserves the same care as the primary round it sits beside.
A note before we start: this article is general information, not legal, tax or investment advice. Rules differ between the US, the UK and Europe and change over time, so talk to a qualified lawyer and tax adviser before you plan any sale of your shares.
Primary vs secondary: where the money goes
Every funding round has a primary component. The company issues new shares, investors pay for them, and the cash goes onto the company's balance sheet to fund growth. A secondary sale is different. Existing shareholders sell shares they already own, and the buyer pays the seller directly. The company receives nothing, and the total number of shares does not change.
In a growth round, the two often happen together. A lead investor might buy a large block of new shares from the company and, alongside it, buy a smaller block from the founders. Some investors like this because it increases their ownership without adding more cash to the company than it needs.
Common forms of founder liquidity
- Direct secondary in the round: the new investor buys a small number of founder shares at or near the round price.
- Company-run tender offer: the company organizes a structured sale where founders, and often employees, can sell shares to approved buyers at a set price.
- Repurchase by the company: the company buys back some founder shares using part of the round proceeds. This is less common because investors usually want their money spent on growth.
Pro tip
Before you raise liquidity with anyone, read your own share documents. Founder shares often carry transfer restrictions, a right of first refusal for the company and co-sale rights for investors. Knowing those rules first makes your conversations far more credible.
Who has to approve a founder secondary
A founder cannot simply sell shares to whoever they like. Secondary sales in growth rounds usually need board and investor approval. The specific approvals depend on your documents, but common ones include:
- Board approval, because the company typically has to consent to transfers and may need to waive its own right of first refusal.
- Investor consent, often from a majority of preferred shareholders, under your shareholder or investor rights agreements.
- Waivers of co-sale rights, which otherwise let existing investors sell alongside you on the same terms.
- Buyer eligibility checks, so the new shareholder meets securities law requirements in your jurisdiction.
Because founders usually sit on the board, they have a conflict of interest when the board approves their own sale. Good practice is for the founder to disclose the interest and for independent or investor directors to lead the decision. Your lawyer can advise on the right process.
How a secondary can affect your 409A and employees
In the US, employee stock options are usually priced at fair market value based on a 409A valuation of the company's common stock. When founders sell common shares to an investor at a high price, that sale is evidence of what common stock is worth. Valuation firms may take it into account, which can push the 409A value up.
A higher 409A value means new employee options carry a higher exercise price, which makes them less attractive to new hires. That is one reason investors and boards pay close attention to how a founder sale is priced and structured. Some companies time their 409A update carefully, and some structure the sale so the price paid for founder shares reflects the difference between common and preferred rights. These are technical areas, so involve your valuation provider and lawyer early.
In the UK, a similar concern applies to EMI options, which are the main tax-advantaged scheme for small companies. A sale of shares at a higher price may influence the value agreed for future option grants, so check with your adviser before the sale.
Common mistake
Treating the secondary as a private deal between you and the investor. A founder sale affects the cap table, the 409A, employee morale and sometimes other shareholders' rights. Bring the board in early and tell your team in a clear, honest way once the deal is approved.
How to raise liquidity with investors
The way you ask matters as much as the amount. Investors want to know that you are taking care of a personal need, not losing faith in the business. Here is a sequence that keeps the conversation constructive.
- Know your reason. Write down why you want liquidity in one or two sentences: paying off loans, buying a home, supporting family. A clear personal reason reassures investors.
- Keep the amount modest. Decide on a portion of your holding that still leaves you heavily invested. Investors watch the share you keep far more closely than the cash you receive.
- Raise it after the primary terms are clear. Let the investor agree the main round first, then introduce the secondary. Leading with it can make the whole round look like an exit.
- Talk to your lawyer and tax adviser. Confirm transfer restrictions, approvals needed and the tax treatment of the sale in your country before you agree a price.
- Consider including employees. If early employees also hold shares or vested options, a broader tender offer can spread the benefit and protect team morale.
- Get approvals in writing. Collect board approval, investor consents and any waivers, and document them in your board minutes.
- Update the cap table and 409A plan. Record the transfer the same week and agree with your valuation provider how the sale will be reflected.
Hypothetical example
Lena co-founded a logistics software company six years ago and paid herself a low salary throughout. In a September growth round, the lead investor agrees the primary terms first. Lena then explains that she has personal loans from the early years and would like to sell a small part of her shares. She proposes an amount that keeps her stake almost unchanged, and suggests the company also offers early employees a chance to sell a little. The board's investor directors lead the approval, the company discusses the effect on its next 409A with its valuation provider, and the team hears about the tender in an all-hands meeting. Names and details here are made up for illustration.
A liquidity planning template
Use this simple planning table to prepare before you speak to investors. Fill one row per seller. The rows below use clearly labeled made-up example amounts.
| Seller | Shares held | Shares to sell | Share of holding sold | Personal reason | Approvals needed |
|---|---|---|---|---|---|
| Founder 1 | Example: 2,000,000 | Example: 100,000 | Example: 5% | Repay early personal loans | Board, preferred majority, co-sale waiver |
| Founder 2 | Example: 1,800,000 | Example: 90,000 | Example: 5% | Home purchase deposit | Board, preferred majority, co-sale waiver |
| Early employees (tender) | Example: 300,000 vested | Example: up to 30,000 | Example: up to 10% | Shared liquidity for long-serving staff | Board, tender terms approved by investors |
Seeing every seller side by side helps you and the board judge fairness, and it shows investors you have thought beyond your own position.
Taxes and personal planning
Selling shares usually creates a taxable gain for you, and the rules depend on where you live, how long you have held the shares and how they were acquired. In the US, founders who filed an 83(b) election within 30 days of receiving restricted stock may be in a different position from those who did not. Qualified small business stock under Section 1202 can give a federal tax exclusion on gains for eligible C-Corp shares held long enough, but the conditions are detailed and a partial sale may affect your planning, so check current rules.
In the UK and Europe, capital gains rules and any relief you might claim also depend on your circumstances. Get personal tax advice before you agree terms, not after the money arrives. It is also wise to decide in advance what you will do with the proceeds, so a one-off payment actually fixes the problem you set out to solve.
Your founder liquidity checklist
- Read your share documents for transfer limits, first refusal and co-sale rights
- Write down your personal reason for wanting liquidity
- Choose a modest portion that keeps you heavily invested
- Agree the primary round terms before raising the secondary
- Get legal and personal tax advice on the sale
- Consider a tender offer that includes early employees
- Collect board approval, investor consents and waivers in writing
- Update the cap table and plan the 409A impact with your valuation provider
Frequently asked questions
Will asking for liquidity make investors think I want to leave?
It can if the amount is large or the reason is vague. A modest sale with a clear personal reason, raised after the main round terms are agreed, is usually received much better. Investors want to see that you stay heavily invested.
Does a founder secondary dilute other shareholders?
No new shares are created, so ownership percentages for other shareholders do not change. The shares simply move from you to the buyer. The primary part of the round is what creates dilution.
Why does a secondary sale matter for employee options?
In the US, option exercise prices are usually set from a 409A valuation of common stock. A founder sale of common shares at a high price may push that valuation up, which raises the exercise price for future grants.
Can early-stage founders take liquidity too?
It is much less common before growth rounds, because early investors usually want every dollar spent on the business. Most founder liquidity happens once a company has meaningful revenue and strong investor demand.
Related reading
The bottom line
Founder liquidity in a growth round is no longer unusual, and handled well it can make you a calmer, more committed leader. The keys are a modest amount, a clear reason, proper approvals and early advice on taxes and the 409A.
Treat the sale as a company decision, not a private side deal. Bring in the board, think about your team, and you can take some pressure off your personal finances while keeping trust with everyone who backed you.
