Is a Secondary Sales Program Right for Your Private Company?

If you're like most private company leaders, the topic of secondary sales probably brings up more questions than answers.

• Should we allow employees to sell their equity?
• What about 409A complications?
• How do we even set this up?
• And the big one: will this mess with our company valuation?

You're not alone feeling uncertain about secondary sales. While they've become increasingly common in today's market, many private companies still treat them like uncharted territory. The good news? Secondary sales don't have to be scary or impossibly complex. With the right approach and understanding, they can become a valuable tool for both your company and your employees.

What Is a Secondary Sale?

A secondary sale occurs when an existing shareholder—such as an employee, founder, or early investor—sells their stock in a private company to another party. Unlike a primary issuance, which raises new money for the company, secondary sales transfer ownership between existing and new (or other existing) shareholders. They don’t raise capital for the company itself, but they do provide liquidity for shareholders.

Why Secondary Sales Matter More Than Ever

Let's start with the reality: your employees want liquidity options. In an environment where companies are staying private longer, traditional liquidity events like IPOs are increasingly distant. Employees who joined your company early might be sitting on significant paper wealth but struggling to access it for major life events such as buying homes, paying for education, or simply diversifying their financial portfolios.

Secondary sales for private companies offer a middle ground. They provide employees with some liquidity while keeping your company private and in control of its timeline. For companies, they can be a powerful employee retention and recruitment tool, demonstrating that you value employee financial wellness beyond just offering equity.

The Benefits: More Than Just Employee Happiness

Employee Retention and Satisfaction: Nothing says "we value you" quite like giving employees a path to realize some of their equity value. This is especially powerful for longer-tenured employees who might otherwise be tempted by opportunities at companies closer to liquidity events or more immediate salary increases. 

Attraction of Top Talent: In competitive hiring markets, being able to tell candidates that there are potential liquidity opportunities before an exit can be a significant differentiator.

Market Validation: Secondary sales can provide valuable data points about how outside investors view your company's value, offering market validation that complements your formal valuation processes.

Controlled Liquidity: Unlike surprise acquisition offers or pressure to go public, secondary sales programs let you provide liquidity on your timeline and your terms.

But Benefits Come with Caveats

It’s worth noting that without clear policies and communication, secondary activity can create challenges. Employees eager to sell may push leadership for ad hoc approvals, distracting from company priorities. Poorly structured transactions can also raise compliance concerns or confuse employees about company valuation. These risks may not outweigh the benefits, but they do highlight why structure and planning are critical.

The Challenges: Real but Manageable

Let's address the elephant in the room because yes, there are legitimate concerns about secondary sales for private companies, but they're not insurmountable.

409A Valuation Complexity: This is probably the biggest worry for most companies. If employees are selling at prices different from your 409A valuation, does that create problems? The short answer is it can, but proper structuring minimizes this risk. Working with experienced valuation firms who understand secondary equity transactions is crucial. They can help you understand how market transactions should (or shouldn't) influence your 409A process.

Administrative Burden: Secondary liquidity programs do require more work than just granting equity and forgetting about it. You'll need processes for approving transactions, managing stock transfer restrictions, updating cap tables, and ensuring compliance. However, this administrative work is manageable with the right systems and potentially third-party support. In fact, at Equity Admin Co., this service is one we are routinely engaged to handle for many private companies.

Price Discovery Challenges: Unlike public markets, there's no obvious "correct" price for private company shares. Buyers and sellers negotiate based on limited information, and those negotiated prices might not reflect your company's internal valuation. This isn't necessarily bad, it's just different, and requires thoughtful communication.

Regulatory and Compliance Considerations: Depending on your company structure and the buyers involved, you may need to navigate securities regulations, right of first refusal (ROFR) provisions, and transfer restrictions. These aren't roadblocks, but they do require careful attention.

Other Common Questions About Secondary Sales

Beyond these challenges, companies often ask a few recurring questions when considering secondary sales. Here are some examples:

Does a company need to hit a certain level of success first?

While there’s no minimum requirement, buyers in secondary markets generally look for companies with proven financial performance, strong investor backing, or name recognition. For early-stage startups, demand for stock will likely be limited.

Does the company need to help facilitate the transaction?

In almost every case, yes. Secondary platforms and private transfers typically require company cooperation—providing updated cap table data, confirming the seller is an authorized shareholder, and verifying that the transfer complies with restrictions. Without this cooperation, transactions are rarely possible.

Can employees sell without employer permission?

Generally, no. Most private companies have transfer restrictions in their charters, stock option agreements, or shareholder agreements. These include rights of first refusal, board or investor consent requirements, and company policy restrictions. Attempting to bypass these rules can lead to compliance issues or even legal disputes.

Best Practices for Private Companies Liquidity Programs

Start with Clear Secondary Sale Policies: Before you need them, establish clear policies about who can sell, when, to whom, and under what conditions. This prevents ad hoc decision-making when employees come knocking.

Maintain Company Control: Consider implementing right of first refusal or co-sale rights that let the company or existing investors participate in or block transactions. This ensures secondary sales align with your broader strategic goals.

Work with Experienced Professionals: Don't go it alone. Partner with your law firm, valuation experts, and potentially specialized platforms that understand the nuances of private company secondary transactions.

Communicate Transparently: Be upfront with employees about the process, timeline, and potential outcomes. Managing expectations prevents disappointment and maintains trust.

Consider Structured Programs: Rather than handling secondary sales on a purely ad hoc basis, consider implementing structured programs and perhaps annual or semi-annual secondary liquidity windows when transactions can occur.

Making the Decision: Is It Right for You?

Secondary sales aren't right for every company at every stage. Early-stage companies with limited operating history might find the administrative complexity outweighs the benefits. Companies very close to liquidity events might prefer to wait.

But for many growing private companies, especially those with employees who've been waiting years for liquidity, secondary sales programs can be a game-changer. They're particularly valuable if you're seeing employee retention challenges, competing for talent with companies offering more immediate liquidity, or simply want to demonstrate that you take employee financial needs and equity compensation planning seriously.

The key is to approach secondary sales thoughtfully rather than reactively. Start the conversation before you need to. Build the framework before employees start asking. And remember you don't have to solve every possible complexity before getting started. Many successful secondary programs began with simple structures that evolved over time.

A Quick Checklist to Gauge Readiness

Ask yourself the following:

• Is our company at a stage where outside investors would be interested in buying shares?
• Are employee retention or recruiting challenges making liquidity more urgent?
• Do we have the administrative capacity (or partners) to manage approvals and cap table updates?
• Is leadership aligned on how much liquidity we’re comfortable offering?

If the answer is “yes” to several of these, it may be time to explore a secondary program more seriously.

Moving Forward

Secondary sales represent a significant shift from the traditional "wait for the exit" approach to employee equity compensation. They're not without complexity, but they're also not the regulatory challenge that many companies fear. With proper planning, professional guidance, and clear communication, they can become a valuable tool in your employee equity compensation strategy toolkit.

The question isn't whether secondary sales for employees are complicated – they are. The question is whether the benefits to your employees and your company justify working through that complexity. For many private companies today, the answer is "yes."

Remember: every company's situation is unique. Before implementing any secondary sales program, consult with legal, tax, and valuation professionals who can help you navigate the specific considerations relevant to your company and employees.