Secondary Funds and Continuation Vehicles Explained
Startups can take many years to reach a sale or a public listing, but venture funds have fixed lifespans and their own investors waiting to be paid back. Secondary funds and continuation vehicles exist to bridge that gap. If you are a founder, you may never set one up yourself, yet one could end up on your cap table. Here is what they are, how they work and what to ask when one comes knocking.
Key takeaways
- A secondary transaction is a sale of existing shares or fund stakes from one holder to another. No new money goes into the company.
- Secondary funds specialize in buying those existing stakes, either single company shares or whole portfolios of fund interests.
- A continuation vehicle is a new fund set up by an existing investor so it can keep holding a company after the original fund's life ends.
- For founders, these deals can bring a new shareholder, affect information rights and set a reference price for your shares, so stay involved.
Most founders learn about primary funding first: you raise money, new shares are issued and the cash lands in the company bank account. Secondary deals work differently, and they are becoming a bigger part of startup life as companies stay private for longer. Knowing the basics helps you respond confidently when an early investor says they want to sell, or when you hear the phrase "continuation fund" for the first time on a board call.
This article is general information, not investment, legal or tax advice. Secondary transactions involve securities laws, transfer restrictions in your company documents and tax rules that vary by country. Bring in a lawyer before approving or taking part in any sale.
Primary vs secondary: the basic difference
In a primary transaction, the company issues new shares and receives the money. Existing shareholders are diluted, and the company has more cash to spend.
In a secondary transaction, an existing holder sells shares they already own to a buyer. The money goes to the seller, not the company. The total number of shares usually stays the same; only the names on the cap table change.
| Primary | Secondary | |
|---|---|---|
| Who receives the money | The company | The selling shareholder |
| New shares issued | Yes | Usually no |
| Dilution for existing holders | Yes | Usually no |
| Main purpose | Fund growth | Give liquidity to a holder |
Secondary sales can happen at the level of a single company's shares, or at the level of an investment fund, where an investor in the fund sells their interest in that fund to someone else.
What secondary funds do
A secondary fund is an investment fund that specializes in buying existing stakes rather than backing new companies directly. They come in a few broad flavors.
Direct secondaries
The secondary fund buys shares in a specific company from an existing holder. That holder might be an early angel, a former employee, a founder selling a small slice, or an earlier venture fund that wants to return money to its own investors.
Fund interest secondaries
The secondary fund buys an investor's position in a venture or private equity fund. For example, a pension fund or family office that invested in a venture fund years ago might want cash now rather than waiting for the fund to wind down. The buyer steps into its place.
GP-led secondaries
Here the fund manager (the general partner, or GP) organizes the deal. Instead of an outside investor selling, the GP arranges for one or more of its portfolio companies to move into a new structure. This is where continuation vehicles come in.
Pro tip
When someone mentions a secondary, ask one simple question first: "Is any new money going into the company?" The answer tells you immediately whether you are looking at a primary raise, a secondary sale or a mix of both.
Continuation vehicles explained
Venture and private equity funds are usually set up with a fixed life. After that period, the fund manager is expected to sell the remaining holdings and return money to the fund's investors, often called limited partners or LPs. Extensions are sometimes possible, but they have limits.
Now imagine a fund near the end of its life holding a stake in a company that is still growing strongly. Selling now could mean selling too early. A continuation vehicle offers another route.
- The GP creates a new fund. This new vehicle is set up specifically to hold one or a few assets from the old fund.
- The asset is valued. A price is agreed for the stake being moved, often with input from secondary buyers and sometimes an independent opinion.
- Existing LPs choose. Each LP in the old fund can usually either take cash at that price or roll their interest into the new vehicle.
- New investors fund the cash-out. Secondary funds and other buyers provide the money for LPs who choose to sell.
- The GP keeps managing the stake. The same firm continues to hold and support the company, now through the continuation vehicle.
From the outside, it can look as if nothing changed: the same investor firm still holds your shares. Behind the scenes, though, the economics and the people who ultimately own that stake may be quite different.
Why investors use these structures
It helps to understand the motives on each side, so you can read the situation clearly.
- Fund deadlines. A fund near the end of its life needs to return money, even if a company is not ready to be sold.
- Liquidity for LPs. Some LPs want cash to rebalance their portfolios or meet their own obligations.
- More time for winners. A GP that believes in a company may want to keep backing it rather than sell early.
- Portfolio clean-up. Funds sometimes sell smaller positions to focus on fewer companies.
- Early holder liquidity. Angels and early employees may want to sell part of their stake after many years.
Common mistake
Assuming a secondary sale is a vote of no confidence. Sometimes it is, but often the seller simply has a deadline or needs liquidity. Ask why they are selling before you draw conclusions, and do not let rumors about it unsettle your team.
What it means for your startup
You may not be a party to a continuation vehicle or a fund-level sale, but the effects can still reach you.
A new name on the cap table
Direct secondary sales bring in new shareholders. Some will be supportive; some will be passive financial buyers who want regular updates and little else. Think about who you are comfortable having as an owner.
Transfer restrictions and approvals
Most startup documents limit who can sell shares and to whom. Common terms include a right of first refusal for the company or existing investors, co-sale rights and board consent requirements. Check your articles, shareholder agreement and investor rights agreement before any transfer.
A reference price
A secondary sale sets a price that people may later point to. A price well below your last round can affect how employees and future investors view the company. In the US, it may also be considered in a 409A valuation for option pricing, so talk to your valuation provider.
Information rights and confidentiality
New holders may ask for financial information. Decide what you will share, and make sure confidentiality terms are in place before sending anything sensitive.
Investor incentives and timelines
A continuation vehicle usually resets the clock on when that investor expects an exit. That can be good news, since the investor has more time. It can also mean new expectations, so ask the GP how their plans for the company have changed.
A founder's secondary review template
When a secondary sale or continuation deal touches your company, track it in a simple table. The example rows use made-up names and figures for illustration only.
| Seller | Buyer | Type | Shares or stake (example) | Approvals needed | Status |
|---|---|---|---|---|---|
| Early angel A | Secondary fund X | Direct secondary | 50,000 common shares | Board consent, ROFR waiver | Docs under legal review |
| Seed fund B | Continuation vehicle B-II | GP-led continuation | Full preferred stake | Check transfer clause | Info request received |
| Former employee C | Existing investor D | Direct secondary | 10,000 exercised shares | ROFR process | Waiting on company decision |
Hypothetical example
Lena founded a climate software company eight years ago. Her seed investor's fund is approaching the end of its life, but her company is still growing. The seed firm tells her it plans to move its stake into a continuation vehicle backed by two secondary funds. Lena asks her lawyer to check the transfer clauses, asks the GP what the new vehicle's timeline is, and agrees on what financial information the new backers will receive. The firm stays on her cap table with fresh time to support her, and Lena understands exactly who now sits behind it.
Your secondary transaction checklist
- Ask whether any new money is going into the company
- Find out who is selling, who is buying and why
- Read the transfer restrictions in your company documents
- Check rights of first refusal and co-sale rights
- Agree confidentiality terms before sharing information
- Consider how the price may affect employees and future valuations
- For continuation vehicles, ask about the new timeline and expectations
- Get legal advice before approving any transfer
Frequently asked questions
Does a secondary sale dilute founders?
Usually not, because existing shares change hands and no new shares are issued. Dilution comes from primary rounds, option pool increases and similar new issuance.
Can founders sell shares in a secondary?
Sometimes, often as a small part of a larger round. Investors generally want founders to stay committed, so founder sales are usually modest. Any sale must follow your company's transfer rules, and the tax treatment depends on your situation.
Do I have to approve a continuation vehicle?
It depends on your documents and the deal structure. If shares legally move to a new entity, transfer clauses may apply. If only the fund's ownership changes, the company may have no formal role. Ask your lawyer to check.
Is a continuation vehicle good or bad for my company?
Neither by default. It can give a supportive investor more time to back you. It can also bring new parties and expectations. Understanding the reasons and the new timeline helps you judge.
Related reading
The bottom line
Secondary funds buy existing stakes, and continuation vehicles let an investor keep holding a company after its original fund runs out of time. Neither brings new cash into your business, but both can change who owns your company, what they expect and what price people reference for your shares.
If one of these deals reaches your company, ask why it is happening, read your transfer clauses, protect your information and get legal advice. Staying informed turns a confusing finance term into something you can manage with confidence.
