Secondary Sales & Liquidity Events
“Founders and early employees are often told to wait for the exit. But the secondary market has changed that calculus. Structured correctly, a secondary sale lets you take some risk off the table without losing your seat at the table.” — John Montague
Secondary sales—transactions in which existing stockholders sell their shares to third-party buyers rather than the company issuing new shares—have become a significant part of the venture capital ecosystem. For founders, early employees, and early-stage investors, secondary sales offer a path to partial liquidity without waiting for an IPO or acquisition. For buyers, they offer access to high-growth private companies at potentially favorable pricing.
The legal mechanics of these transactions are more complex than they appear. Transfer restrictions in the charter and investors’ rights agreement, rights of first refusal, co-sale (tag-along) rights, board approval requirements, and securities law compliance all intersect in a secondary sale. I’ve navigated these mechanics across more than 15 years of work with technology companies and their investors, including experience structuring private equity and venture capital transactions at Locke Lord LLP (now Troutman Pepper Locke), an AM Law 200 firm. At Montague Law, I represent sellers, buyers, and companies in secondary transactions ranging from single-founder share sales to structured tender offers.
What I Handle in Secondary Transactions
Transfer restriction and ROFR analysis. Almost every venture-backed company restricts the transfer of shares. The company’s charter, bylaws, investors’ rights agreement, and right of first refusal and co-sale agreement (ROFR/Co-Sale Agreement) typically require that any proposed transfer be offered first to the company and then to existing investors before it can be completed with a third party. I analyze the full set of transfer restrictions, determine what consents and waivers are needed, and navigate the process to ensure the sale is valid and enforceable.
Stock purchase agreement drafting for secondary sales. Secondary transactions require a purchase agreement between the seller and the buyer—distinct from the company’s primary financing documents. I draft agreements that address purchase price, representations and warranties (which differ from primary round reps because the seller is typically an individual, not the company), indemnification, securities law representations, and transfer mechanics. The buyer needs assurance they’re getting clean title to freely transferable shares (subject to existing restrictions); the seller needs a clean exit from their ownership position.
Company-sponsored tender offers. Some companies facilitate liquidity for stockholders by conducting structured tender offers—inviting all eligible stockholders to sell a portion of their shares at a set price, often to a dedicated secondary fund or a new investor. I advise companies on structuring these tenders to comply with securities laws, treat stockholders equitably, and minimize disruption to the cap table and governance structure.
Securities law compliance. Private company shares are “restricted securities” under the Securities Act of 1933. Sales of restricted securities must comply with an available exemption—typically Section 4(a)(1) (sales by persons other than issuers, underwriters, or dealers), often coupled with Section 4(a)(7) (which provides a specific exemption for secondary sales to accredited investors under certain conditions) or conducted under Rule 144 if applicable. I ensure that every secondary transaction is structured within the bounds of applicable securities law to protect both the seller and the buyer.
Tax planning coordination. Secondary sales trigger capital gains tax for the seller. The tax treatment depends on the type of stock (common vs. preferred), the holding period, whether the shares qualify as Qualified Small Business Stock (QSBS) under Section 1202 of the Internal Revenue Code, and the seller’s individual tax situation. While I don’t provide tax advice, I coordinate with the seller’s tax advisor and structure the transaction timing and mechanics to facilitate optimal tax treatment.
The Growth of the Secondary Market
The secondary market for venture-backed company shares has matured considerably. Dedicated secondary platforms and funds now facilitate billions of dollars in private company share transactions annually. This market growth has been driven by several factors: venture-backed companies staying private longer (the median time from founding to IPO now exceeds seven years), employees accumulating significant paper wealth they can’t access, and early investors seeking returns for their own LPs before a formal exit event.
For founders, secondary sales raise a delicate question: how much stock can you sell without signaling to investors that you’re losing conviction in the company? The answer depends on the amount, the timing, and the narrative. Selling 10% of your holdings during a structured liquidity event that the board has approved is viewed very differently from quietly selling shares on a secondary platform. I advise founders on structuring partial liquidity in a way that’s legally clean, commercially defensible, and doesn’t create governance complications.
For early-stage investors—angels and seed funds—secondary sales can be an important portfolio management tool. Returning capital to LPs from a winning investment, even before a formal exit, strengthens fundraising for the next fund and demonstrates realized (not just paper) returns.
John’s Tip: If you’re considering a secondary sale, start by reading your ROFR/Co-Sale Agreement and your stockholders’ agreement word for word. These documents govern whether you can sell, to whom, at what price, and what process you have to follow. I’ve seen transactions collapse because the seller assumed they could freely transfer their shares and discovered—after negotiating with a buyer—that the company and existing investors had blocking rights they intended to exercise.
Frequently Asked Questions
Can I sell my startup shares before the company goes public?
In most cases, yes—but not freely. Venture-backed companies almost universally impose transfer restrictions on their stock. You’ll typically need to offer your shares first to the company and then to existing investors (under rights of first refusal), obtain board approval, and comply with securities law requirements. Some companies also impose outright lockup periods during which sales are prohibited. The process is manageable but requires careful navigation of the governing documents and applicable law.
What is a right of first refusal and how does it affect a secondary sale?
A right of first refusal (ROFR) gives the company and/or existing investors the right to purchase shares that a stockholder proposes to sell to a third party, at the same price and on the same terms. The ROFR holder typically has 15 to 30 days to decide whether to exercise. If they exercise, the sale to the third-party buyer doesn’t happen—the ROFR holder buys the shares instead. If they waive, the sale proceeds. The existence of a ROFR doesn’t prevent secondary sales, but it adds a procedural step and introduces the possibility that the sale goes to an existing holder rather than the intended buyer.
What is Section 1202 QSBS and can it apply to a secondary sale?
Section 1202 of the Internal Revenue Code allows taxpayers to exclude from federal income tax up to $10 million (or 10 times the adjusted basis) in gain from the sale of Qualified Small Business Stock (QSBS) held for more than five years, if certain requirements are met. The stock must be original-issue stock in a domestic C corporation with gross assets under $50 million at the time of issuance. Whether QSBS exclusion applies to a secondary sale depends on whether the seller acquired original-issue stock and meets the holding period requirement. This is a tax question that should be analyzed with a qualified tax advisor, but I ensure the transaction is structured to preserve QSBS eligibility where applicable.
About John Montague
John Montague advises founders, early-stage investors, and technology companies on secondary sales, liquidity events, and stockholder transactions. With over 15 years of experience in venture capital and private equity—including work at Locke Lord LLP (now Troutman Pepper Locke), an AM Law 200 firm—John navigates the legal, governance, and securities law complexities of private company share transfers. He holds a J.D. from the University of Florida’s Fredric G. Levin College of Law and an accounting degree from Stetson University. Montague Law serves clients from offices in Fernandina Beach and Coral Gables (Miami), Florida.
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