Tuesday, March 28, 2017

Secondary Sales in VC-backed startups: A Quick Primer for Entrepreneurs

I was recently approached by several entrepreneurs who had launched successful VC-backed companies who wanted to learn more about “secondaries”.    As I described my experiences, I realized that in my 20+ years doing startups, I had been part of many different types of secondaries at many stages of the startup lifecycle.
The first time was just after the first VC round I’d ever raised back in 1995, and a few friends, who were doctors and such, wanted to get in on the round because our startup was “hot” and “growing”.  Since the round was already completed, but they really really wanted to be in the company, my co founder and I offered to sell them $10k of our shares.   Today this would be a very small (actually, tiny) secondary transaction.
Since then, I’ve been on both a buyer of secondaries, usually of late stage companies prior to their IPOs (companies like Facebook, Twitter, Pinterest), as well as a seller of secondary shares of rapidly growing startups I was a co-founder, advisor, or early investor in.
What follows is a quick primer on secondaries for entrepreneurs - what they are, why you would want to do one, how you would go about it, and a bit about the benefits and risks of such sales.
What is a Secondary Sale?
A “secondary” sale is when a shareholder (typically one of the founders or an early employee or an early investor) of a private company sells his or her shares to another buyer.

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