Secondary Sales: When Founders Can Sell Shares
Most founders spend years with nearly all their net worth tied up in shares they cannot easily sell. A secondary sale is one of the few ways to turn some of that paper value into real money before an exit. This explainer covers what secondary sales are, when founders can realistically sell, which approvals stand in the way and how to raise the subject without spooking your investors.
Key takeaways
- A secondary sale means an existing shareholder sells shares to a buyer. The money goes to the seller, not to the company.
- Private company shares usually cannot be sold freely. Sales typically need company approval and may be subject to a right of first refusal (ROFR).
- Founder secondaries most often happen alongside a priced funding round, when there is already a buyer and an agreed valuation.
- Keep the sale modest, explain your reasons openly and get legal and tax advice before you sign anything.
If you have built a startup that is growing and attracting investors, you may be "rich on paper" while still paying rent from a modest founder salary, which can push you toward an early exit just to feel secure.
Secondary sales exist partly to solve that problem. Done well, a small sale can give you breathing room and help you stay focused on the long game. Done badly, it can send the wrong signal to investors or create tax and legal headaches. Let's look at how it works.
A quick note before we start: this article is general information, not legal, tax or investment advice. Share transfer rules depend on your company documents and where you live, so talk to a startup lawyer and a tax professional before you act.
What a secondary sale actually is
When a startup raises money in a normal funding round, it issues new shares and the cash goes into the company's bank account. That is called a primary sale. In a secondary sale, no new shares are created. An existing shareholder, such as a founder, an early employee or an angel, sells some of the shares they already own to a new or existing investor. The buyer pays the seller directly.
Because the company does not receive the money, a secondary sale does not extend your runway. It changes who owns the shares, not how many exist. Total ownership percentages stay the same overall, but the buyer now holds a slice that used to be yours.
Common forms of secondary sales
- Founder secondary in a funding round. A new investor buys mostly new shares from the company plus a small block directly from the founders.
- Tender offer. The company or an investor offers to buy shares from a wider group, often employees and early holders, at a set price during a set window.
- One-off direct sale. A single shareholder agrees a sale with a single buyer, then seeks the approvals the company documents require.
When founders can realistically sell shares
There is no fixed rule for when a founder "earns" the right to sell. In practice, a few conditions tend to come together before a founder secondary is realistic.
- There is real demand for the company's shares. Investors are competing to get into a round, or an existing investor wants to own more than the new round allows.
- The company has a clear valuation. A recent priced round gives buyer and seller an agreed reference point.
- The founder has vested shares. You can generally only sell shares you actually own outright. A common vesting pattern is 4 years with a 1-year cliff (rule of thumb), so unvested shares are usually off the table.
- The board and investors support it. Without their approval, most sales cannot go through.
- The amount is sensible. Investors usually want founders to keep most of their stake so they stay motivated.
Pro tip
If you think you will want liquidity in the next round, mention it early to your lead investor, not on the day the term sheet arrives. A calm, early conversation gives them time to plan the round structure and makes the request feel like part of the plan rather than a surprise.
The approvals and restrictions that stand in the way
Private company shares are not like listed shares you can sell with a tap on an app. Your company documents almost always restrict transfers. Before you talk to any buyer, read these documents carefully or ask your lawyer to summarize them for you.
Company approval
Secondary sales usually need company approval. The bylaws, articles of association or a shareholders' agreement may say the board must consent to any transfer. Some companies have a written policy that limits secondary sales to specific windows or to approved buyers only.
Right of first refusal (ROFR)
A ROFR means that before you sell to an outside buyer, the company, and sometimes existing investors, get the chance to buy the shares on the same terms. In practice you agree a price with a buyer, notify the holders of the ROFR, and wait for them to decide whether to step in.
Co-sale rights
Many investor agreements include co-sale (sometimes called tag-along) rights. If a founder sells shares, certain investors may be allowed to sell a proportionate part of their own shares to the same buyer on the same terms. That can reduce how many shares you personally get to sell.
Lock-ups, securities rules and tax
Some agreements lock up shares for a period, and securities laws can limit who may buy private shares and how. Tax treatment also varies a lot. In the US, the type of share, how long you have held it and whether you filed an 83(b) election within 30 days of receiving restricted stock can all affect the result. Some eligible C-Corp shares held long enough may qualify for a federal exclusion under Section 1202 (qualified small business stock), so check the current rules with a tax professional before you sell, because a sale can affect that position.
Common mistake
Shaking hands on a price with a buyer before checking your own company documents. If a ROFR, co-sale right or board approval applies, you may not be able to deliver the deal you promised. Read the documents first, then negotiate.
How pricing works in a secondary
There is no stock exchange setting the price, so the buyer and seller agree it. The most common reference point is the price per share in the latest priced round. Founder common shares, however, usually carry fewer rights than the preferred shares investors buy, so buyers may offer a discount to the preferred price.
Price can also affect other parts of the business. In the US, options are usually priced at fair market value based on a 409A valuation. A secondary sale at a particular price may be considered by the valuation firm the next time it values your common stock, which can change the exercise price for future employee options. Talk to your lawyer and your valuation provider about this before you agree a number.
How to run a founder secondary step by step
Every company is different, but most founder secondaries follow a similar path. Use this as a planning guide and adapt it with your lawyer.
- Get clear on your reason. Write down why you want to sell and what amount would actually solve the problem, such as paying off personal debt or making a home deposit.
- Read your documents. Check transfer restrictions, ROFR, co-sale rights, lock-ups and any board approval requirement.
- Talk to your co-founders. Agree whether all founders will sell, how much each will sell and how you will present it.
- Raise it with your lead investor and board. Explain the reason, the amount and why it helps the company. Ask for their view before you approach any buyer.
- Agree the buyer and terms. Often this is the new lead investor in a round. Settle the share class, price, timing and costs.
- Handle the approvals. Send the required notices, wait for the ROFR and co-sale periods to run, and get the board consent in writing.
- Sign and close. Sign the share transfer agreement, update the cap table and keep records of everything.
- Plan for tax. Set aside money for any tax due before you spend the proceeds.
Founder secondary planning template
Copy this table into a spreadsheet and fill in one row per founder or sale. The amounts below are made up for illustration only.
| Seller | Vested shares (example) | Shares to sell (example) | % of holding | Price per share (example) | Approvals needed | Reason |
|---|---|---|---|---|---|---|
| Founder A (CEO) | 2,000,000 | 100,000 | 5% | $4.00 | Board consent, ROFR notice | Pay off student loans |
| Founder B (CTO) | 1,800,000 | 90,000 | 5% | $4.00 | Board consent, ROFR notice | Home deposit |
| Early employee | 150,000 | 15,000 | 10% | $4.00 | Board consent, company policy | Personal savings |
Add columns for "estimated tax set aside" and "closing date" so nothing is forgotten once the money arrives.
Hypothetical example
Imagine Priya and Tom, co-founders of a B2B software startup, are raising a growth round. The new lead investor wants a larger stake than the company needs to issue. Priya explains to the board that both founders have taken low salaries for years and would like to sell a small part of their vested shares. Using the made-up numbers above, each founder sells about 5% of their holding to the new lead at a price agreed with the board. Existing investors waive their ROFR and co-sale rights for this round. The founders set aside money for tax straight away and use the rest to clear personal debt.
How investors and employees see it
Investors' views of founder secondaries vary. Many accept that a modest sale can reduce founder stress and help the team aim for a bigger outcome. Others worry that a founder who has already "taken money off the table" might be less driven. The size of the sale and the way you explain it shape which view wins.
Employees may also notice. If founders sell while employees cannot, it can feel unfair. Some companies handle this by opening a tender offer that lets employees sell a small portion of their vested shares too. Whether that is right for you depends on your stage, your investors and the rules in your documents.
UK and European notes
The basic idea is the same in the UK and Europe: an existing shareholder sells to a buyer, and the company's articles and shareholders' agreement control whether and how that can happen. Pre-emption rights on transfer, which work much like a ROFR, are common in UK articles. Tax treatment, stamp duty and any rules linked to share schemes such as EMI options can differ, so check with a UK tax adviser and your company's lawyer before agreeing a sale.
Your secondary sale checklist
- Write down why you want to sell and the amount that solves the problem
- Confirm how many of your shares have vested
- Read your bylaws or articles and shareholders' agreement for transfer rules
- Check for ROFR, co-sale, lock-up and board approval requirements
- Agree an approach with your co-founders
- Raise the idea with your lead investor and board early
- Settle buyer, share class, price, timing and costs
- Ask how the price might affect future valuations of common stock
- Get legal and tax advice before signing
- Set aside money for tax as soon as the sale closes
Frequently asked questions
Does a secondary sale give the company more money?
No. In a secondary sale, the buyer pays the selling shareholder directly. The company's cash balance and runway stay the same. Only a primary sale, where the company issues new shares, brings money into the business.
How much should a founder sell in a secondary?
There is no fixed rule. Investors usually prefer founders to sell a small portion and keep most of their stake. Start from what you actually need to remove personal financial pressure, then discuss the amount openly with your board.
Can I sell shares to anyone I like?
Usually not. Private company shares are normally subject to transfer restrictions in the company documents, such as board approval and a right of first refusal. Securities laws can also limit who may buy. Check your documents and get legal advice first.
Will selling shares hurt my next fundraise?
It can if the sale looks large or poorly explained. A modest sale, raised early and agreed with your lead investor, is far less likely to cause concern. Being transparent is the best protection.
Related reading
The bottom line
A secondary sale lets founders turn a small part of their paper wealth into real money, but private shares come with strings attached. Expect to need company approval, to respect any ROFR or co-sale rights, and to agree the price carefully because it can ripple into future valuations and taxes.
If liquidity would help you stay in the game, start with your documents, then have an early and honest conversation with your lead investor. Keep the amount modest, get proper legal and tax advice, and you can ease the pressure without weakening the trust your company runs on.
