What is the secondary market in venture capital?

The secondary market lets people buy and sell existing stakes in private companies or funds. Unlike the public stock market, where trades happen instantly, each deal here needs its own negotiation, paperwork, valuation, and legal process.

The main difference from the primary market is that the money goes to the seller, not the company. The company does not get new funding; it simply adds a new shareholder to its records. For founders, this is mostly paperwork. Because of this, the startup can quickly approve or block the deal if the new shareholder is not a good fit, depending on the terms.

Venture capital investments are naturally hard to sell quickly. If you invest in a startup, you often have to wait years before you can cash out. On average, it takes 3 to 12 years from the first investment to exit, even for successful companies.

The secondary market can help shorten this wait. For example, a seller might need cash, while a buyer may want to join the company before it goes public, but at a later stage.

The secondary market includes many types of deals, platforms, and participants. It covers everything from an engineer selling a small number of options to huge restructuring deals between big institutions. This variety makes the market both flexible and complex.

Key differences between the primary and secondary markets

To understand the secondary market, it helps to know how shares first enter the primary market.

When a startup raises money from business angels, venture capital funds, or crowdfunding, it creates new shares. It increases the total number of shares, meaning existing shareholders own a smaller percentage of the company while the company receives new capital. That’s how the primary market works: new shares, new money for the company, and new responsibilities to new investors.

No new shares are created in the secondary market. Instead, the buyer purchases an existing stake from the seller at an agreed price. The company does not get any money; it just updates its list of shareholders. That’s why secondary transactions are often neutral or even positive for founders and management: the shareholder base can improve, early investors can exit more easily, and relationships with the board stay stable.

How the secondary market works in venture capital deals

Key participants

The secondary market includes many types of participants, each with their own reasons for joining, timeframes, and deal sizes.

• Sellers include early-stage venture capital funds requiring liquidity to return capital to limited partners (LPs); business angels seeking to realise profits after years of waiting; and company employees holding accumulated options, which is particularly relevant in later rounds where valuations are already high. Other sellers include corporate venture capital units that are changing their investment strategy or winding down.

• Buyers include specialised secondary funds, such as Lexington Partners, HarbourVest Partners, Coller Capital and Ardian, which systematically purchase portfolios and fund stakes; crossover funds, such as Tiger Global or Coatue, which invest in companies prior to IPOs; family offices and ultra-high-net-worth individuals (UHNWIs) seeking access to private markets outside of traditional funds; and mutual and hedge funds diversifying their portfolios with private assets.

• Intermediaries include brokers and specialised platforms such as Forge Global, Nasdaq Private Market, EquityZen, Augment and CartaX, which aggregate supply and demand and simplify the search for a counterparty. Other intermediaries include investment banks and M&A boutiques for large, structured deals, as well as legal and financial advisers who assist with document preparation and deal closing.

How the transaction works

A secondary transaction is similar to a small M&A deal, but the people involved often have less experience and learn as they go.

The first step is for the seller to check whether they have the right to sell their stake. Most shareholders' agreements contain transfer restrictions, such as a right of first refusal for the company or other shareholders, a prohibition on transfers to competitors, and a requirement to obtain the board of directors' express consent. Breaching these conditions may invalidate the transaction.

Once this is confirmed, the seller can start looking for a buyer, either on their own or with a broker. Brokers charge a commission, usually 2 to 5% of the deal, but they can make the process faster and help find a buyer at a fair price. Next, both sides negotiate the price based on the latest funding round and may add a discount or premium depending on demand and market conditions. They also agree on which rights are included with the stake.

If both sides agree on the main terms, the buyer starts due diligence. It means checking the company’s cap table, financial statements, share classes, and ensuring the stake is legally sound. At the same time, lawyers prepare the purchase agreement, which is the main document for the deal. Once it is signed, the company is told about the new shareholder, and the change is recorded. Depending on the deal's complexity, the size of the stake, and the company's level of cooperation, the process can take a few weeks to several months.

Types of secondary transactions

Tender offers

A tender offer is an organised process, made public within the company, which is initiated either by the company itself or by an external buyer. All shareholders are offered the opportunity to sell their shares at a fixed price within a specified period, usually 20–30 days. For example, a company might raise a new round of funding and simultaneously announce a tender offer, enabling early investors or employees to partially exit without waiting for an IPO.

Tender offers are the most transparent and structured way to do secondary deals. Everyone knows the terms in advance, the price is the same across all share classes, and joining is optional. For employees, this is often the only practical way to convert their options into cash before an IPO, since they do not have to find a buyer or navigate complex legal steps. They just submit an application and get the money in their account a few weeks later. Companies like Stripe, SpaceX, Klarna, Canva, and many others have used these programs.

Tender offers also benefit investor-buyers because they can access multiple offers in a single deal. The downside is that there is no room to negotiate: the price is fixed, and the terms are standard. Buyers must either accept these terms or not take part.

Direct secondary sales

A direct sale is the most common and informal type of deal. One seller negotiates with one buyer, and they agree on the price and terms together. There are no public announcements, no need to involve all shareholders, and no set deadlines. It could be a deal between two people who know each other well or a transaction arranged by a broker between strangers.

The main challenge here is finding a buyer or seller and agreeing on a fair price, since there is no transparent market. Discounts of 20 to 40% compared to the last funding round are common, especially if the seller is in a hurry or the stake is small and hard to sell. Platforms like Forge and EquityZen aim to help by bringing buyers and sellers together, but even with them, the market remains less transparent than public exchanges.

Direct sales are especially common among employees at unicorn companies. Someone who has worked at a company for seven years and built up a lot of vested options may not want, or be able, to wait another five years for the IPO. By using a platform or broker, they can find a buyer and turn their options into real money instead of just paper value.

Fund secondaries and GP-led transactions

Another type of deal is selling whole stakes in venture capital funds, not just individual shares. In the LP secondary market, a partner sells their stake in a fund to another investor. It lets them exit early, without waiting for the fund’s term to end, which is usually 10 years or more. The buyer gets a ready-made, diversified portfolio of companies but also takes on the risks, so they usually ask for a discount to the fund’s NAV (net asset value).

GP-led deals have become much more common in the last decade. In these deals, the fund’s general partner takes the lead. Instead of selling a top asset to another buyer, the GP transfers it to a new continuation vehicle, a separate legal entity with a new term. Existing LPs can either cash out or stay in the new structure and keep sharing in the company’s growth. It lets the GP keep the best assets without being forced to sell at a bad time.

Why do companies and investors use the secondary market?

Sellers and buyers often have very different reasons for using the secondary market. Still, both sides are usually motivated by practical financial interests, not desperation or impatience.

For sellers:

• Liquidity without an exit. A fund can return part of the LP’s capital and improve the IRR without waiting for an IPO or an M&A deal. It is particularly important if the fund is approaching the end of its stated term.
• Portfolio rebalancing: If a single position has become disproportionately large relative to the entire portfolio due to company growth, a partial secondary sale can reduce concentration and lower risk.
• Change of strategy: For example, a corporate CVC may exit a non-core asset following a change in the parent company's priorities, or an early-stage angel investor may wish to reallocate capital to new deals.
• Monetisation for the team. Founders and employees can exercise their options early, without waiting for an IPO. It is a good way to retain key staff and reduce turnover risk.
• LP pressure. If fund partners demand distributions but portfolio companies are not yet ready for an exit, the secondary market can offer a partial solution, preventing the forced sale of assets at bargain prices.

For buyers:

• Access to later-stage companies that have already proven their business model, have revenue, a product and a team, and therefore potentially lower risk.
• A shorter exit timeframe. You can buy a stake in a company that is already close to an exit. It can improve your return on investment, even if the valuation multiple is lower.
• A discount on public valuation. Even for large unicorn companies, the secondary market price is often lower than the IPO price, because public markets offer greater liquidity.
• You can get diversification through fund secondaries. By buying a stake in a fund, you instantly get access to dozens of companies without having to search for each deal yourself.

For companies, the secondary market has both pros and cons. It helps them retain valuable employees by allowing them to cash out some options, attract experienced institutional shareholders rather than retail investors, and remove inactive investors from the cap table. But the company loses some control over who becomes a shareholder, which can make managing the company and future funding rounds harder.

How are prices determined in the secondary market?

Pricing in the secondary market is mostly determined by negotiation. There is no central exchange, no standard quotes, and no need to share deal terms. The starting point is always the company’s latest valuation in the primary round. After that, the price can go up or down based on different factors.

Timing is important. For example, if the last round was a year ago and the company has since doubled its ARR, the market might add a premium to that valuation. On the other hand, if the market has cooled, similar public companies are trading lower, and competitors are cutting staff, you can expect a big discount.

At the peak of 2021, some secondary deals closed at a premium to their prior valuations. Between 2022 and 2023, discounts of 30–50% became the norm, even for well-known companies.

The rights that come with the shares have a big impact on price. Shares that let you join future rounds (pro rata) and give you information rights are much more valuable than those with only economic rights. Buyers need to factor in these rights, and sellers should remember they are selling not just a stake in the company, but also a specific set of rights and obligations.

Supply and demand set the final price within the agreed range. Top companies like OpenAI, Anthropic, and SpaceX often see secondary deals with little or no discount, or even at a premium, because there are more buyers than sellers. For less well-known mid-stage companies, the buyer usually sets the terms.

Experienced buyers often use the seller’s urgency to their advantage. For example, a fund that needs to pay LPs by the end of the quarter might accept a 25% discount on a stake that could be worth 10 to 15% more in six months. If you are selling, try not to seem rushed. If you are buying, always find out the seller’s real motivation.

Benchmarks for valuation:

• 409A valuation (for US companies).
• Reports from independent valuers.
• Public transaction data on platforms such as Forge.
• Valuations of public comparables applying an illiquidity discount (typically 20–35%).

However, none of these methods gives a definite answer. The actual price always comes from negotiations between specific people at a certain moment.

The limitations and risks of the secondary market

Although the secondary market is a powerful tool, it has important caveats that should not be overlooked.

Information asymmetry: This is arguably the greatest structural risk for the buyer. As a rule, the seller knows considerably more about the company: an early-stage fund may have had access to internal reports for years, attended board meetings and interacted with management informally. However, the buyer receives limited public information and the results of their own due diligence, which are always incomplete. The most dangerous scenario is when the seller is exiting due to an internal negative signal, such as a loss of key clients, conflict within the founding team or regulatory risk. At the same time, the buyer is unaware of this and overpays for a troubled asset.

Transfer restrictions: Most shareholder agreements contain lock-up periods, rights of first refusal, and consent requirements. The company may refuse to approve the transaction if it disapproves of the buyer, for example, if they are a competitor, a venture capital fund with a poor reputation, or simply an undesirable player. Obtaining a refusal under the ROFR takes time (usually 30–60 days) and, if the company exercises its right, the buyer will be left with nothing, having wasted time and incurred legal costs. Verifying the legal feasibility of the transaction is an essential first step.

Relative liquidity. Finding a buyer for a small stake in an unknown start-up can take months or even prove impossible without offering a substantial discount. Even for large, well-known companies, the market remains thin; it is impossible to sell a large block of shares in a single day without significantly affecting the price. It is not NASDAQ. There are no market makers here who are required to support the quotes.

The complexity of valuation. Without transparent markets and standard methods, it is easy to either overpay or sell too cheaply. Less experienced participants may focus too much on the last funding round, ignore a significant decline in the situation, or undervalue a good asset due to fear or insufficient analysis. Investing in good due diligence and independent valuation pays off many times over.

Regulatory context. In the US, trading in private securities is regulated by the SEC, specifically under Regulation D for accredited investors. Violations can lead to significant fines and invalidate the transaction. While the regulatory environments differ in Ukraine and the EU, the principle remains the same: transactions involving illiquid private assets require legal soundness and an understanding of the relevant laws. Legal support is an essential part of any serious secondary transaction.

How should you prepare for a secondary transaction?

No matter which side of the transaction you are on, preparation is what separates successful deals from difficult, drawn-out ones. Here is a practical approach for both parties.

If you are the seller:

• Check the shareholders’ agreement and the company’s articles of association for any restrictions on ROFRs, consent requirements, and lock-up periods. Understand who needs to be notified, the response timeframe, and whether the company has the right to exercise the right of first refusal (ROFR) instead of your buyer.
• Compile a full set of documentation. It should include proof of share ownership, certificates or entries in the register, the relevant provisions of the shareholders’ agreement and information on the class of shares and associated rights.
• Determine a realistic price range. Talk to a broker and look at available data on secondary transactions in companies with a similar profile and stage of development. Do not focus solely on the most recent primary round, as market conditions may have changed significantly since then.
• Do not appear to be in a hurry during negotiations. If you urgently need liquidity, avoid showing it to the buyer, as demonstrating pressure, whether conscious or unconscious, will significantly weaken your negotiating position.
• Hire a lawyer who specialises in private markets and M&A transactions. Mistakes in documentation and missed restrictions can be much more expensive than the cost of good legal support.

If you are an investor:

• Carry out thorough due diligence. Study the capitalisation table and familiarise yourself with the structure of share classes and liquidation preferences. Understand where you stand in the payout order under different exit scenarios. Selling at a valuation below or above your investment amount will have very different results.
• Find out the seller’s real motive. If an early-stage fund with a strong track record is exiting, ask why, and listen carefully to the answer. Sometimes it is simply the end of the fund’s term or rebalancing. However, there may be internal reasons behind the sale that the seller is not obliged to disclose to you.
• Check exactly which rights are being transferred to you. Do you retain information rights? Do you have voting rights at shareholders' meetings? Will you have pro rata participation in future funding rounds? These details directly affect the value of your stake and your ability to defend your position.
• Consider the time horizon and think about different scenarios, such as what would happen if the IPO were delayed by 3 to 5 years beyond the expected timeline. Does the expected return justify the current price when you factor in the time value of money and liquidity risk?
• Use platforms and brokers to compare prices, even if you plan to negotiate directly. Knowing the current market range will give you confidence in negotiations and protect you from overpaying.

The secondary market is a well-established tool for managing risk and liquidity within venture capital portfolios. As companies stay private for longer, with the average time to IPO rising from 4 to over 12 years in the last 20 years, the importance of the secondary market will only grow. What was once considered unusual is becoming the norm in the venture capital industry.

For experienced investors and founders, understanding the mechanics of secondary transactions is a core competency that enables them to make better decisions regarding liquidity, valuation, and portfolio structure.