How can you structure a secondary market sale of shares in a startup?

A secondary market sale refers to the buying and selling of shares that have already been issued, as opposed to primary market transactions where shares are initially issued by the company itself. In the context of a startup, secondary market sales typically involve existing shareholders (such as founders, early employees, or initial investors) selling their shares to other parties, often investors or employees seeking to acquire ownership in the company.

You need to take secondary market sale in consideration at the start of the venture by issuing prefered shares and common shares to keep control in case you need to raise extra capital.

Secondary markets offer a pretty cool escape hatch for early investors and employees of startups who want to cash in on their shares before the big events like IPOs. It's like getting a sneak peek at what their stakes are worth and being able to turn that into real money when needed. Plus, it can keep team members happy, showing them that their hard-earned equity is not just paper money. But it's all about balance — you don't want to go overboard and disrupt the company’s share structure or future plans.

As a founder, realize that a secondary market sale is diluting the demand for your company's shares. Investors can purchase shares on the secondary market instead of from the company in the next round. Think about what restrictions you want to place on founders and investors as regards rights to sale, either in the Investor Rights Agreement or in the ROFR agreement. Both may want the ability to sell some shares.

Secondary market sales in private companies happen when people who already own part of the company sell their shares to others. These sales have different reasons. Firstly, they help investors who want to make money or have cash available. Sometimes, employees with company shares can sell them too. Investors who put money into the company early on might want to sell their shares to get their investment back with profits. Companies themselves might also organize these sales to get more money without making new shares. This lets existing owners sell their shares to new people. Sometimes, changes in the company's ownership, like when it merges with another company or changes its strategy, can also cause these sales.

Selling shares on a secondary market can be fraught with legal hurdles. Startups often set rules limiting share transfers to protect their interests and those of early investors, meaning shareholders may find they cannot sell their stakes as freely as they would like. Furthermore, when stakeholders offload their shares, it can signal a lack of faith in the company's future, potentially dampening the morale and drive of the team—key ingredients for a startup's growth and success.

Your ability to sell your shares will be limited by the Investor Rights Agreement and by the Rights of First Refusal agreement. You may be limited on how many shares you can sell. You are likely limited to not selling shares to a competitor. And you are likely required to offer the shares to the company, or other existing investors, first on the same terms as your anticipated sale. The buyer you have found will be subject to the same terms as you.

Selling shares in private companies can be tricky and might not be for everyone. Here's why: First, it can be hard to find buyers quickly since private markets aren't as easy to access as public ones. Figuring out how much your shares are worth is also tough because it's subjective and can lead to disagreements. Plus, there are a lot of rules and laws to follow, like securities laws and tax stuff. Selling shares can also cause problems between people who own the company and those who manage it, leading to arguments over who's in charge. If the sales become public, it could affect how people see the company, and selling too soon might mean missing out on future growth.

Probably if you are an early investor and you want to exit either due to a liquidity need at your end, probably B is the earliest it makes sense and which would be planned at your end. Depending on the market interest and the funding plans for primary and your own rights and duties in the SSA, you could explore a seconday along with a primary new investor, or could offer to an existing investor on the captable. Some other investors who missed a chance to enter early and now wish to including family offices or other vehicles can look at this stake if its sizeable enough for them. Most funds may want primary and some secondary and existing investor may want a discount on the price. Then its a demand supply and timing equation to be solved

Implementing a share repurchase by the company is an astute strategy, yet it demands careful and well-planned execution. This approach serves as an efficient secondary sale solution, accomplishing two principal goals. First, it provides a strategic exit for early-stage angel investors, enabling them to monetize their investments. Second, it's instrumental in restructuring the cap table, significantly enhancing business management. Additionally, the strategically utilized repurchased shares in mechanisms like option pools or ESOPs offer further benefits. This not only incentivizes employees but also bolsters their dedication to the company’s growth. The success of this strategy hinges on its meticulous planning and execution.

Selling shares in private companies can be tough. Limited liquidity means it's hard to find buyers quickly, making transactions slow. Valuing shares is tricky, leading to disagreements on their worth. Legal hoops, like securities laws and taxes, are time-consuming and costly. Sales can strain relationships between owners and managers, causing conflicts over control. Public disclosure of sales may harm the company's reputation, and selling early could mean missing out on growth opportunities. Lastly, selling shares to new investors may reduce the original owners' control. These challenges show that selling shares in private companies requires careful thought.

Sale of shares by a founder is generally viewed as a negative by potential investors. So, you as a founder will need to have a good explanation for why you want to do this. One possible one: you have spent the better part of a decade building this business, and you need some financial security to continue to devote your life to building the business.

Based on my experience, in secondary markets, investors often find themselves selling shares at lower prices than those achieved in financing rounds. When an investor seeks to liquidate their stake, they may encounter a limited number of buyers or face a discounted valuation of the company. For example, if a company is valued at US$50 million in a funding round, the investor might need to sell their shares at a reduced effective value, say US$40 million. This scenario reflects the unique dynamics of secondary markets, where liquidity and demand significantly influence the share prices.

Es un mercado que está evolucionando muy rápido. Obviamente las condiciones legales que acompa?en la adquisición de la acción determina lo que es posible hacer con ella (preferencias, tiempo, catidad, etc), acá 2 ejemplos como sucede. En Chile está Broota, con una plataforma para gestionar crowdfunding, con mas de 10 a?os en el mercado, administra 2 fondos de startups y ha hecho 68 rondas de crowfunding, cuenta con 4000 inversionistas con 24.000 millones de pesos invertidos; ahí observo como.las transacciones de acciones secundarias es cada vez mas recurrente a?o a a?o. Este a?o para Latam lanzaron Attom (Antonia Rojas ex ALLVP) un fondo de secundarias directas que busca darle liquidez al ecosistema y seguro será un éxito;

- Appraise: Get an up-to-date valuation for the shares. - Check Agreements: Review shareholder agreements for resale clauses. - Legalities: Ensure compliance with securities laws and bylaws. - Find Buyers: Identify potential buyers, like current investors or new accredited ones. - Sale Mechanics: Opt for direct sales or secondary platforms, considering a single or multiple buyers. - Transfer Protocol: Set out a clear share transfer process. - Inform: Provide full disclosure to buyers on the company’s status. - Execute: Close with legal documentation and funds/share transfers. - Notify: Communicate the sale to the company and shareholders. - Post-Sale: Address any information rights or obligations.