Secondary Sales by Employees Explained
Sooner or later, someone on your team will ask whether they can sell some of their startup shares before an exit. That is a secondary sale, and handling it well can reward loyal people and protect your cap table at the same time. This explainer covers how employee secondaries work, the rules that usually apply and how to build a fair policy before the first request lands in your inbox.
Key takeaways
- A secondary sale is when an existing shareholder, such as an employee, sells shares to someone else. The company does not raise new money.
- Employee secondaries usually face transfer restrictions, a company right of first refusal (ROFR) and board approval.
- Some companies run organized tender offers instead of handling one-off requests.
- Taxes on options and shares can be complex, so employees should get personal tax advice before they sell.
In the early years of a startup, equity is mostly a promise. Employees hold stock or options that may be worth a lot one day, but they cannot easily turn them into cash. As companies stay private for longer, more people want a way to sell a small part of their holdings, perhaps to buy a home, pay off debt or simply reduce risk.
For founders, those requests raise real questions. Who is allowed to buy? At what price? Will a sale affect your valuation, your option pricing or your relationship with investors? This guide walks through the basics. A quick note: this is general information, not legal, tax or investment advice. Securities and tax rules are detailed and vary by country, so work with a startup lawyer and tax adviser before you approve or run any sale.
What a secondary sale is
A primary sale is when the company issues new shares and receives the money, as in a normal funding round. A secondary sale is different: an existing shareholder sells shares they already own to a buyer, and the money goes to the seller, not the company.
Employee secondaries come in two common forms.
- One-off sales. An individual employee finds a buyer, often an existing investor or a specialist secondary fund, and asks the company to approve the transfer.
- Organized tender offers. The company arranges a structured program where a buyer, or sometimes the company itself, offers to purchase shares from eligible holders at a set price, within set limits and over a set window.
Secondaries can also happen alongside a funding round, when a new investor buys some shares from founders or early employees as well as new shares from the company.
The rules that usually apply
Most startups protect their cap table with restrictions in their bylaws, articles of association, shareholder agreements and equity plan documents. Before anyone sells, check what your documents actually say.
Transfer restrictions
Many startups limit or prohibit share transfers without company consent. These restrictions help keep the cap table manageable, avoid unwanted shareholders such as competitors and reduce legal complications. Some plans also limit transfers of shares acquired through options.
Right of first refusal (ROFR)
A ROFR gives the company, and sometimes major investors, the right to buy the shares on the same terms before the seller can sell to an outside buyer. In practice, the company may waive it, use it or assign it to an investor. It gives the company control over who joins the cap table.
Board approval
Transfers often need board approval. Directors consider whether the sale fits company policy, whether the buyer is acceptable and how the price might affect the company, including option pricing.
Options versus shares
Employees with options usually must exercise them before they own shares that can be sold. In the US, options are usually priced at fair market value based on a 409A valuation, and the type of option, ISO or NSO, affects how taxes work. Exercising and taxes can be complex. In the UK, EMI options are the main tax-advantaged scheme for small companies, and their tax treatment depends on the plan rules and the circumstances of the sale. Employees should get personal tax advice before exercising or selling.
Common mistake
Approving a one-off sale at a high price without thinking about the knock-on effects. A secondary price can be relevant to future 409A valuations in the US, which may affect the exercise price of new options for the rest of your team. Talk to your valuation provider and lawyer before you approve the price.
Why companies allow employee secondaries, and why some do not
There are good reasons on both sides. A thoughtful policy weighs them openly.
Reasons to allow them:
- Long-serving employees can reduce personal financial pressure without leaving the company.
- It can help with retention and recruiting, because equity feels more real.
- An organized program lets you choose buyers and keep control of the cap table.
Reasons to be careful:
- Sales can affect valuations and option pricing.
- Unmanaged requests take up legal time and board attention.
- Employees who sell a large share may feel less motivated by future upside.
- Investors may have views, and some documents give them rights in the process.
Many companies settle on a middle path: no ad hoc sales, but an occasional organized tender offer with clear limits.
How to run an employee secondary program
If you decide to offer liquidity, an organized process is usually easier and fairer than handling requests one by one. Here is a practical sequence to adapt with your lawyer.
- Review your documents. Check bylaws or articles, shareholder agreements, equity plan rules and investor rights for transfer limits, ROFR and approval steps.
- Set your policy. Decide who is eligible (for example, by tenure), how much each person can sell (often a percentage of vested holdings) and how often programs run.
- Choose buyers. Decide whether existing investors, a new investor or the company will buy, and agree the price with advice from your lawyer and valuation provider.
- Get approvals. Secure board approval and any investor consents your documents require, and record decisions in board minutes.
- Communicate clearly. Give eligible employees a plain-language summary, the deadline and a reminder to get personal tax advice. Make sure nobody feels pressured to sell or not to sell.
- Handle paperwork and tax reporting. Process exercises, transfers and any payroll or tax reporting the sale may trigger. This varies by country and by type of equity.
- Update the cap table. Record every transfer promptly and check that your cap table and share register match.
An employee secondary policy template
Use this table as a starting point for your internal policy. The entries are made-up examples for illustration only, not recommended terms.
| Policy item | Example rule | Who approves | Notes |
|---|---|---|---|
| Eligibility | Current employees with at least 2 years of service | Board | Former employees considered case by case |
| Sale limit | Up to 20% of vested shares per program | Board | Founders follow a separate limit agreed with investors |
| Frequency | One organized program per year at most | Board and lead investor | No ad hoc transfers outside programs |
Write the final policy in a short document and keep it with your board minutes so future requests can be answered consistently.
Hypothetical example
Imagine Rosa, founder of a growing B2B startup. After a strong year, three early engineers ask to sell shares to a secondary fund. Rather than approve three separate deals, Rosa works with her lawyer and lead investor to run one tender offer alongside the next funding round. The new lead investor agrees to buy a limited number of shares from eligible employees, each person can sell up to a set share of their vested holdings, and everyone gets the same price and the same written summary. The engineers get some liquidity, the cap table stays tidy and the board approves one process instead of three. (This is a made-up scenario for illustration.)
Pro tip
Create your secondary policy before you need it. A clear, written answer ready for the first request feels fair and consistent, while a rushed decision under pressure can set a precedent you regret.
What employees should weigh before selling
Founders cannot give personal advice, but you can help your team ask good questions. Encourage anyone thinking about a sale to consider these points with their own adviser:
- Their personal goals. Is the money for a specific need, such as a home deposit, or simply to reduce risk? Selling only what they need keeps more future upside.
- The cost of exercising. Options may need to be exercised first, which can require cash and may create a tax bill before any sale proceeds arrive.
- Timing and tax. When they exercise, how long they hold and where they live can all change the tax outcome.
- What they keep. Selling part of a holding does not usually change unvested equity, but they should confirm how their plan treats it.
Late in the year is a natural time to raise the topic with your board, as you plan next year's budget, hiring and any funding round. If a raise is on the horizon, ask whether a limited secondary component could fit into it.
Your employee secondary checklist
- Review transfer restrictions, ROFR and approval rules in your documents
- Decide whether you will allow one-off sales, organized programs or neither
- Write a policy on eligibility, sale limits and frequency
- Talk to your valuation provider about effects on option pricing
- Agree buyers and price with legal advice
- Get board and any investor approvals and record them in minutes
- Send employees a clear summary and remind them to get tax advice
- Update your cap table and share register after every transfer
Frequently asked questions
Can an employee sell startup shares without company approval?
Usually not. Most startups have transfer restrictions, a right of first refusal and board approval requirements. Check your company's documents, because the specific rules vary.
Does a secondary sale raise money for the company?
No. The money goes to the selling shareholder. If the company wants new capital, it needs a primary sale of new shares, although both can happen in the same round.
Can former employees join a tender offer?
It depends on the company's policy and documents. Some programs include former employees who still hold shares, while others are limited to current staff. Decide in advance and apply the rule consistently.
How are employees taxed when they sell?
It depends on the country, the type of equity, how long it was held and other personal factors. Taxes on options and shares can be complex, so every seller should get advice from a qualified tax professional before they sell.
Related reading
The bottom line
Secondary sales by employees can be a fair way to share early success, as long as they follow your documents and a clear policy. Respect transfer restrictions, the right of first refusal and board approval, think through the effect on valuation and option pricing, and keep your cap table accurate.
Draft your policy now, before the first request arrives. When someone on your team asks, you will have a calm, consistent answer ready.
