FAQ
A secondary transaction, also known as a non-issuer transaction, involves the sale of private company stock owned by an existing shareholder. It differs from a primary transaction in that no new stock is issued.
Founders, early employees and early investors are the most common sellers of private stock, as they have typically gone the longest without liquidity.
Many entrepreneurs inadvertently employ a personal investment strategy that can be extremely risky: equity in their company represents the majority of their net worth. In addition, the average time from first round of funding to exit is now nine years, almost twice what it was in 2001. Having so much of one’s net worth allocated to such an illiquid investment can be a very frustrating and nerve-racking financial situation. Secondary transactions allow people in this position to diversify their personal assets, thereby decreasing exposure to risk while still maintaining some upside from future growth.
We evaluate investor suitability on a deal-by-deal basis in order to maximize our efficiency and avoid any conflicts of interest. The majority of our investors are passive, institutional investment firms, including secondary funds, venture capital funds, family offices, hedge funds and mutual funds. When appropriate, we also present our opportunities to angel investors and other accredited individual investors.
Though this can vary depending on the company’s cooperation, ROFR terms, due diligence expectations and a number of other factors, most of our past transactions have closed within 30 to 120 days from submitting an executed offer letter.
The level of client participation varies from transaction to transaction, depending on the nature of the client’s relationship with the company. When working with current executives, we typically ask them to provide as much due diligence material as possible, such as financial statements, capitalization tables, investor presentations, board meeting slides and any other information that can help investors evaluate the company. When working with former employees, any introductions to current management are greatly appreciated, but not mandatory. In some cases, clients choose to make themselves available to pitch the deal and/or answer investor questions. Generally speaking, more client participation increases the likelihood of a successful close.
Though there are no specific requirements for a successful sale, we find that investors like to focus on later- stage, venture-backed companies with thriving operations. They typically seek the following criteria: impressive growth prospects, significant unrealized value, a proven business model, a seasoned management team and at least $25 million in annual revenue. Other compelling characteristics include the existence of reputable investors and a clear path to a liquidity event within the next three years.
The extent to which one’s shares are transferable varies significantly. All sales of private stock are subject to various federal and state securities regulations. In most cases, there are also additional restrictions imposed by the company that issued the securities. These can include rights of first refusal (ROFRs), requirements for the board to approve any buyers, provisions against secondary sales and/or various other restrictions. Since this is such a case-by-case issue, it is better suited to a direct conversation with us to discuss the transferability of your stock.