Author: Oleg Ryabtsev
Managing partner, C&C
Economic Substance of the Secondary Market
The secondary market for shares (secondaries) refers to transactions involving a company’s shares without the participation of the company itself. The shares are sold by current shareholders of the company.
Many late-stage companies (such as Revolut, Notion) limit the pool of investors in their funding rounds, allowing only smart money and strong brands into their cap table. The secondary market opens a “side door” into such companies, allowing ordinary investors to obtain allocations—typically with a 10–20% discount.
On the one hand, secondaries allow early investors and founders to gain liquidity and lock in profits. On the other hand, they impact company valuation and compete with fundraising efforts—which is why the secondary market is highly confidential.
Key to success: experienced investors build relationships with ESOP holders of target companies, analyze hiring and firing trends, and monitor the financial situation of key executives— this enables them to be present when liquidity is needed.
Secondary Market Ecosystem
Secondary shares are traded on private markets, which are accessible only to market participants:
private.ventures — a secondaries fund administered by private.law
Portfolio: Kraken, Flo, Travelperk, Cresta, and other unicorns
Deal Structure and Mechanics
The process of selling secondary shares always follows a sequence of stages, each with its own specifics and requiring specialized expertise:
1. Target Identification and Per-Share Price (PPS) Valuation
Valuation methodologies include comparable company analysis, discounted cash flow (DCF), and analysis of recent funding rounds.
Benchmark: 2–4x return over 12–24 months
2. Identifying the Shareholder for Sale
This stage includes:
- identifying shareholders via PitchBook, LinkedIn, and networks
- obtaining references and arranging introductions
- personal meetings and pitching, building trust
- determining deal terms, identifying restrictions and company policies
3. Due Diligence
Involves analysis of corporate documents, financial statements, IP rights, and contractual obligations. Since deals are often discussed without board or investor involvement, access to pitch decks and recent materials is often limited.
4. Deal Structuring
Direct share purchase — the classic mechanism involving direct transfer of ownership from seller to buyer. Provides full control over the asset but may trigger immediate tax recognition of gains.
Forward contract — enables bypassing corporate restrictions and deferring share transfer (and thus tax obligations), which may be critical for ESOP holders to preserve QSBS (Qualified Small Business Stock) tax benefits.
SPV investor buyout — involves acquiring a stake in an SPV that owns the shares instead of the shares themselves. Simplifies legal structuring and may circumvent corporate restrictions, as the shares do not change ownership.
5. Corporate Consents and Preference Rights
This stage involves obtaining necessary corporate approvals (e.g., from the board of directors) and observing shareholder protection mechanisms:
- Right of First Refusal (ROFR) — grants the company or existing shareholders the right to purchase the shares on the same terms as offered to third parties
- Right of First Offer (ROFO) — requires the seller to first offer shares to the company or existing shareholders before approaching third parties
- Preparing and negotiating documentation can take 4–8 weeks depending on the corporate structure and applicable restrictions
6. Closing Deliverables
Includes updating the company cap table, issuing and transferring share certificates to the new owner, settlement, and share transfer.
Secondary deals close quickly: benchmark 2–30 days depending on relationship with the board
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