Secondary transactions: What they are and how they work

Secondary transactions let startup shareholders sell existing shares to private investors before an IPO or acquisition. Unlike primary transactions, which bring in new capital, secondaries transfer ownership of existing stock without diluting other shareholders.

As companies stay private longer and private equity funds hold assets for extended periods, secondary markets have become an increasingly important source of liquidity. When handled thoughtfully, secondary transactions can create win-win outcomes for founders, employees, and incoming investors.

What are secondary transactions?

A secondary transaction is the sale of existing shares or fund interests between investors, rather than the company issuing new stock. Unlike primary transactions, which issue new shares to raise capital, secondaries transfer ownership without changing your balance sheet or diluting other stakeholders. Understanding the mechanics, and the distinctions between transaction types, helps finance leaders evaluate when a secondary makes sense and what to expect from the process.

In startup contexts, secondary transactions typically involve employees, founders, or early investors selling private company shares. In private equity, secondaries often refer to institutional transactions where investors sell limited partner (LP) interests in funds or participate in general partner (GP)-led continuation vehicles.

Key aspects of secondary transactions include:

• No new capital raised: The company doesn't issue new shares or receive proceeds from the sale
• Liquidity for existing holders: Founders, employees, LPs, or early investors convert illiquid holdings into cash
• Cap table updates: Ownership changes hands, but total shares outstanding remain the same
• Private market transfers: These transactions occur outside public exchanges and are subject to transfer restrictions

Secondary transaction examples

Secondary transactions show up in a few common scenarios, depending on who's selling and why:

• Employee tender offer: An early employee sells vested shares in a company-sponsored tender offer to gain liquidity before an IPO
• Angel-to-growth-fund sale: An early angel or seed investor sells shares to a late-stage growth fund looking for exposure to an established company
• LP portfolio rebalancing: A pension-fund LP sells its stake in a private equity fund to a secondary buyer to rebalance its portfolio

By contrast, issuing new shares during a funding round is a primary transaction, not a secondary. Public market stock trades are also distinct from private market secondaries.

Secondary transactions vs. primary transactions

Primary transactions involve the company issuing new shares to raise capital. Secondary transactions transfer existing shares between parties without adding funds to the company's balance sheet. The distinction matters because it shapes who receives proceeds, how the cap table changes, and what tax treatment applies to each party involved.

Secondary transactions don't affect the company's cash position because no new capital enters the business. That typically means:

• No dilution: Ownership percentages remain unchanged since the company doesn't issue new shares. This preserves existing equity structures.
• No capital infusion: Unlike primary funding rounds, the company receives no additional operating funds. The transaction only changes shareholder composition.

In a primary transaction, the company receives funds from investors purchasing newly issued shares. In a secondary transaction, the selling shareholder receives the proceeds directly. This distinction affects tax treatment, liquidity outcomes, and strategic decision-making.

Here's how the two compare on the dimensions that matter most:

For example, a Series C startup selling newly issued preferred shares to raise cash is a primary transaction. That same startup's early employee selling vested shares to a secondary fund, common in secondary transactions private equity investors pursue, is a secondary transaction. Understanding how common stock fits into these structures helps clarify which shareholders are typically eligible to participate in a secondary sale.

Types of secondary transactions

Secondary transactions come in several forms, each with distinct mechanics, participants, and use cases.

Direct secondaries

These transactions occur when individual shareholders sell their stakes directly to buyers. They're common in late-stage startups where employees or early investors seek liquidity, and they typically require company approval due to transfer restrictions.

Fund secondaries

These involve limited partners selling their interests in private equity or venture funds. Instead of transferring shares in a single company, these transactions transfer exposure to an underlying portfolio of assets. Buyers are often secondary-focused funds or institutional investors.

GP-led secondaries

This structure occurs when fund managers move one or more portfolio companies into a continuation fund. It allows existing investors to exit while enabling the GP and new investors to continue holding high-performing assets.

Tender offers

These allow multiple shareholders to sell shares simultaneously through a structured process. Examples include:

• Company-sponsored: These programs provide organized liquidity events for employees and investors. They often involve preapproved pricing and participation limits.
• Investor-led: External buyers may initiate tender offers to acquire significant ownership stakes. These transactions require regulatory compliance and formal disclosures.

Whether through direct sales, fund interests, GP-led restructuring, or tender offers, secondaries provide flexible liquidity paths tailored to different stakeholder needs.

The secondary market ecosystem

The private equity secondary market has evolved into a mature, institutional asset class over the past three decades. What began as opportunistic portfolio sales has developed into a structured market that provides liquidity to long-term private investors.

This growth reflects structural shifts in private markets. Companies are staying private longer, fund lifecycles are extending, and institutional investors are actively managing liquidity and portfolio exposure.

Secondary market participants

Sellers include LPs, GPs, employees, and founders:

• LPs: Sell fund stakes to rebalance portfolios, meet liquidity needs, or manage exposure to certain managers or sectors
• GPs: May initiate transactions to extend ownership of high-performing assets through continuation vehicles
• Employees and founders: May sell shares to diversify personal wealth or access liquidity

Buyers include secondary funds and institutional investors seeking discounted entry points into private assets. These investors specialize in underwriting illiquid investments and often use detailed valuation modeling to assess risk and return. Their participation provides liquidity and supports price discovery in private markets.

Intermediaries and advisors facilitate transactions by providing valuation guidance, regulatory expertise, and negotiation support. Investment banks, placement agents, and specialized brokers coordinate processes, while legal advisors ensure compliance with securities laws and transfer restrictions.

Market size and growth trends

The global secondary market has expanded significantly in recent years, driven by longer private company lifecycles and increased allocations to private equity and venture capital. Institutional investors increasingly view secondaries as a strategic portfolio management tool rather than a distressed or opportunistic niche.

A notable shift has occurred from primarily LP-led transactions to a growing share of GP-led deals. In LP-led transactions, investors sell fund interests to manage liquidity or rebalance portfolios. In GP-led transactions, fund managers restructure assets into continuation vehicles to extend ownership of high-performing companies while offering existing investors the option to exit.

So why are secondaries so popular right now? Structured secondary transaction volume nearly doubled year-over-year by 2024 as companies increasingly turned to organized liquidity programs. Unspent venture capital now exceeds $311 billion, and companies now take an average of 12 years from founding to IPO.

Median venture valuations also rose more than 40% over 2 years, with late-stage valuations more than doubling. That combination has turned secondaries from a niche workaround into a mainstream liquidity channel for founders, employees, and investors alike.

GP-led transactions have grown right alongside LP-led activity. GP-led volume reached $75 billion in 2024, or almost half of the $162 billion in total secondary market volume that year, up from a prior record of $132 billion in total volume in 2021. Continuation vehicles have become a defining feature of the modern secondary market. These structures allow GPs to raise new capital around a specific asset or portfolio while providing liquidity to investors who prefer to exit.

How secondary transactions work

Secondary transactions allow existing shareholders to sell equity to new or current investors without the company issuing new shares. According to Jefferies, the global limited partner and general partner secondary markets grew from $112 billion to $162 billion between 2023 and 2024, a 45% increase, with continued growth expected in 2025.

Each transaction follows a predictable sequence of steps, though complexity and timelines vary based on structure and the number of parties involved.

Here's how a typical transaction unfolds:

1. Initial setup: The seller decides to sell and determines the number of shares available
2. Buyer identification: Potential buyers are sourced through networks, brokers, or existing investors
3. Price negotiation: Parties negotiate a per-share price, often based on recent valuations or comparable transactions
4. Company approval: The board reviews and approves the sale under ROFR and transfer restrictions
5. Documentation: Legal teams prepare purchase agreements and transfer paperwork
6. Payment and transfer: Funds are exchanged and ownership is updated in the company's cap table

Secondary transactions create liquidity for selling shareholders while preserving the company's cash position and avoiding stock dilution for existing stakeholders.

The transaction process

Initial valuation and pricing set the foundation for negotiations. Buyers typically apply discounts to reflect liquidity constraints, governance limitations, and market risk. Pricing may reference recent funding rounds in startups or net asset value (NAV) estimates in private equity funds.

Due diligence requirements include:

• Financial review: Buyers analyze financial performance, operating metrics, and historical results to assess risk and validate valuation assumptions
• Legal compliance: Documentation review ensures adherence to transfer restrictions, shareholder agreements, and securities regulations

Legal documentation and transfer mechanics involve purchase agreements, consent approvals, and settlement procedures. Most private companies require board approval before shares transfer. Closing timelines typically range from several weeks to a few months, depending on complexity and the number of parties involved.

Valuation considerations

Secondary market pricing often reflects discounts to NAV or the most recent funding valuation due to illiquidity and limited control rights. Typical discounts range between 5% and 30%, depending on asset quality, performance visibility, and broader market conditions. After the steeper discounts common in 2022, median secondary pricing has since rebounded to align more closely with the most recent primary round.

NAV adjustments and pricing methodologies typically incorporate:

• Discount to NAV analysis: Buyers evaluate expected returns relative to perceived risk and holding period
• Cash flow projections: Forward-looking performance estimates influence pricing and risk assumptions
• Recent primary round pricing: Buyers weigh how closely a company's last funding round reflects current fair value

Secondary transactions can also influence 409A valuations by introducing updated market reference points. Significant share transfers may prompt companies to reassess fair market value for tax compliance purposes.

Legal and regulatory framework

Secondary transactions are subject to securities laws and contractual transfer restrictions that govern private market share sales. Requirements vary based on transaction size, structure, and participant type, and companies often impose approval rights to maintain control over their cap tables.

Understanding these legal frameworks helps prevent invalid transfers, regulatory violations, and disputes among shareholders.

Right of first refusal (ROFR)

A right of first refusal (ROFR) allows a company or its existing investors to match a purchase offer before shares are sold to an outside buyer. Most stockholder agreements include this provision to control who joins the cap table.

When a shareholder intends to sell, the sale typically follows this sequence:

1. The shares are first offered to the company at the proposed price
2. If the company declines, existing investors typically have the opportunity to purchase on a pro-rata basis
3. Only if both decline can the seller proceed with an external buyer

The ROFR period fits inside the 60 to 90 days a secondary transaction typically takes, along with due diligence and buyer sourcing. Sellers should account for this window when planning liquidity events.

Regulatory compliance

Tender offers must comply with SEC disclosure and procedural requirements, particularly when multiple shareholders participate in a structured sale. Companies are responsible for ensuring proper documentation and adherence to applicable securities regulations.

Most private secondary transactions are limited to accredited investors, who meet specific income or net worth thresholds. These rules are designed to limit participation in illiquid, unregistered securities to investors with sufficient financial sophistication.

Tax considerations also play a significant role. Transactions may affect capital gains treatment, qualified small business stock (QSBS) eligibility, and reporting obligations. A secondary sale can also affect QSBS holding-period eligibility for the shares involved, depending on how the sale is structured, so founders and employees should check their eligibility before selling. Coordinating with legal and tax advisors helps reduce compliance risk and unintended consequences.

Benefits and risks for stakeholders

Secondary transactions provide liquidity for stakeholders who want to monetize private investments without waiting for an IPO or acquisition. They also create entry opportunities for new investors seeking exposure to established private assets.

For sellers, liquidity can improve financial planning flexibility and reduce concentration risk. For buyers, discounted pricing may enhance potential returns, though valuation and liquidity risks remain.

For founders and employees

Secondary transactions allow founders and employees to access liquidity while continuing to build the company. Diversifying a portion of equity can reduce personal financial risk without requiring a full exit. Selling a partial stake, such as 10% to 20% of vested equity in a tender offer, lets a founder de-risk without signaling a full exit to investors or employees.

Potential downsides include:

• Pricing discounts
• Tax obligations
• Transfer restrictions
• Market timing risks

Large founder sales may also create perception challenges if not communicated clearly. Aligning transaction size and timing with long-term company goals helps maintain trust with investors and employees.

For investors and funds

Secondary transactions support portfolio management by allowing investors to rebalance exposure, exit underperforming positions, or redeploy capital into new opportunities. They can also provide access to high-quality assets that are otherwise difficult to enter.

Buyers of secondary interests can gain several distinct advantages:

• Discount to intrinsic value: Purchasing assets below their true worth can create an immediate unrealized gain
• Earlier liquidity: Assets acquired on the secondary market are often closer to their harvest period than a fresh primary commitment
• Diversification: Buyers can spread exposure across managers, vintages, and sectors in a single transaction
• Portfolio visibility: Secondary buyers see actual portfolio holdings, reducing the blind-pool risk of committing to a fund before it's deployed capital
• J-curve mitigation: Secondaries can shorten or soften the J-curve, the pattern of early negative private-fund returns that later turn positive as investments mature

Risk mitigation approaches also include diversification across asset classes and independent or third-party valuation assessments, both of which improve underwriting discipline.

Structuring secondary transactions

Secondary transactions can be structured through direct sales, tender offers, or continuation vehicles. The structure you choose affects pricing dynamics, regulatory requirements, approval processes, and execution timelines.

Selecting the right approach depends on stakeholder objectives, cap table complexity, and long-term strategic goals, and legal and financial advisors often guide these decisions to reduce risk and improve outcomes.

In practice, the choice often comes down to how many shareholders need liquidity at once: a single seller usually fits a direct sale, while multiple shareholders point toward a tender offer or continuation vehicle.

Direct secondary sales

Direct sales are negotiated transactions between individual buyers and sellers outside a formal company program. They offer flexibility but require coordination among the seller, buyer, company leadership, and legal counsel.

Negotiation of terms may include:

• Pricing agreements
• Transfer approvals
• Settlement timelines

Documentation requirements include purchase agreements, consent forms, and updated cap table records. Closing mechanics involve final approvals, payment exchange, and formal ownership transfer.

Structured liquidity programs

Company-sponsored tender offers give multiple shareholders an organized liquidity opportunity at once. Programmatic liquidity solutions let companies set up recurring windows for share sales, while employee liquidity programs support retention and morale.

Structured approaches improve transparency, standardize pricing, and ensure consistent treatment across participants. Companies often use them to manage ownership transitions while maintaining alignment among investors and employees.

Use Ramp's accounting automation to maximize your tax savings

Secondary transactions introduce accounting, tax, and reporting complexities that require careful documentation. Maintaining accurate records, tracking adjusted basis, and monitoring valuation updates are essential for staying compliant and optimizing financial outcomes.

Ramp's accounting automation software helps finance teams track equity transactions, manage tax implications, and maintain accurate financial records. Automated reporting and integrations reduce manual work and support real-time visibility into liquidity events and ownership changes.

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