Secondary transaction

This is fundraising lingo for a founder or existing shareholder selling her shares to another party. The resulting payment does not go to the startup – which is usually the case if investors buy shares – but to the shareholder who sells.

Example of a secondary transaction

A startup raises USD 100m in a C-Round. At this occasion the two co-founders both sell 3% of their common shares to one of the investors (they own 18% of the company each at this stage). Considering that they both still own a substantial part of the company – and with this remain heavily incentivized to keep up the growth path – this is acceptable for investors.

Recommendation for founders

Doing a secondary transaction in an early stage financing round is not advisable. However, over time – maybe in context with a Series B or C round – it becomes acceptable for investors that founders sell a part of their common shares. 

The best setup to do this is an oversubscribed financing round, where both the needs of the startup for financing as well as the desire of existing shareholders for a secondary transaction can be covered. This website provides insights how to get there (get started here).

In practice it is important to consider tag-along rights and other potentially relevant terms in your shareholders’ agreement. So make sure you prediscuss this with your lawyer before initiating any actions.