Secondary Market

A platform or process for buying and selling shares in private companies before an IPO or acquisition. Platforms like Forge, EquityZen, and EquityBee facilitate these transactions. Provides early liquidity for employees and investors who cannot wait for a traditional exit event.

Why it matters

Startup employees often wait seven to ten years or more for an exit event. During that time, their equity is illiquid, meaning it cannot be converted to cash. Secondary markets provide an alternative path to liquidity, allowing employees to sell some of their vested shares and realize real financial value from their equity compensation.

For investors, secondary markets offer a way to access high-growth private companies that are not yet publicly traded, often at a discount to the primary round valuation. Buyers accept additional risk in exchange for potential upside.

The growth of secondary markets has fundamentally changed how employees think about equity compensation. The promise of eventual liquidity is more credible when secondary options exist, which makes equity grants a more effective recruiting and retention tool. Companies like Stripe and SpaceX have remained private for over a decade in part because their employees can access liquidity through secondary channels without requiring an IPO.

How it works

A seller (typically an employee or early investor) lists their shares on a secondary platform or works with a broker. Buyers, usually accredited investors or funds, bid on the shares. The transaction price is negotiated between buyer and seller, often at a discount to the company's most recent valuation because private shares carry additional risk and lack the liquidity of public stock.

Before any transaction can close, the company must usually approve the transfer. Most shareholder agreements include a right of first refusal (ROFR), giving the company the option to buy the shares instead of allowing the transfer to an outside party. If the company waives its ROFR, existing investors may have a secondary ROFR right as well.

Some companies actively facilitate secondary sales through structured tender offers, where the company sets a price and allows employees to sell a limited number of shares. Companies like Stripe and SpaceX have run periodic tender offers for their employees. Other companies restrict secondary sales entirely to maintain control over their cap table and investor composition.

The tax implications of secondary sales depend on the type of equity being sold and how long shares were held. Shares held for more than one year typically qualify for long-term capital gains rates, but the specifics depend on when options were exercised, whether an 83(b) election was filed, and the type of options held (ISOs vs. NSOs).

Secondary market platforms compared

History and origin

Secondary markets for private company stock existed informally for decades, largely as private brokered transactions between wealthy individuals. The modern secondary market as a structured marketplace emerged in the mid-2000s, driven by the increasing length of time between company founding and IPO. In the 1990s, the average time from founding to IPO was around four years. By the 2010s, that figure had grown to over ten years, leaving employees holding illiquid equity for much longer than expected.

SharesPost launched in 2009 and is widely credited as the first formal secondary marketplace for private company shares. EquityZen followed in 2013. The passage of the JOBS Act in 2012 relaxed some restrictions on private share transfers, making it easier for platforms to operate. By 2015, secondary trading in companies like Uber, Airbnb, and Pinterest had become routine, with dedicated funds established specifically to buy private company shares.

The 2021 SPAC boom and subsequent market correction reshaped secondary markets significantly. As IPO windows closed, demand for private secondary liquidity increased while valuations declined. By 2023 and 2024, secondary markets had matured into a mainstream financing tool, with secondary-focused funds managing billions in assets and platforms processing billions in annual transaction volume. The era of "wait for the IPO" was largely over for well-known late-stage companies.

Frequently asked questions

What is a secondary market for startup equity?

A secondary market is a platform or process that allows shareholders in private companies to sell their shares to buyers before the company goes public or is acquired. Unlike public stock markets, private secondary transactions require company approval and are typically limited to accredited investors.

Who can sell shares on a secondary market?

Current or former employees with vested equity, early investors, and sometimes founders can sell on secondary markets. Most sellers are employees looking for partial liquidity before a formal exit event. Company approval and any right of first refusal must be cleared before a sale can close.

What platforms facilitate secondary sales of private company shares?

The main platforms include Forge Global, EquityZen, EquityBee, and Nasdaq Private Market. AngelList also facilitates some secondary activity. Each platform has different minimum investment sizes, fee structures, and company coverage.

Do I need company approval to sell my shares on a secondary market?

Yes. Almost all shareholder agreements include a right of first refusal (ROFR), which gives the company — and sometimes existing investors — the right to buy your shares before you can sell to an outside party. Some companies also have outright transfer restrictions that prevent secondary sales entirely.

What discount do secondary market shares typically trade at?

Private shares typically trade at a discount of 10-30% to the company's most recent primary-round valuation, though this varies widely. The discount reflects illiquidity risk, uncertainty about exit timing, and the fact that buyers in secondary markets do not receive the same rights as primary investors.

What are the tax implications of selling on a secondary market?

Tax treatment depends on your equity type and holding period. Shares held for more than one year typically qualify for long-term capital gains rates. If you exercised ISOs and held shares for the required periods, gains may qualify for favorable ISO tax treatment. NSO exercises are taxed as ordinary income at exercise.

What is a tender offer in the context of secondary markets?

A tender offer is a company-organized secondary sale where the company (or an outside buyer) sets a fixed price and allows employees to sell a limited number of shares. Companies like Stripe and SpaceX have used tender offers to provide employee liquidity while maintaining control over who ends up on their cap table.

Learn more

• Secondary markets for startup equity: how they work and when to use them
• What is a cap table and why does it matter?
• 83(b) election explained: how to save on taxes when you exercise early
• Types of startup equity: common stock, options, SAFEs, and more

Related terms

• Liquidity Event
• Right of First Refusal (ROFR)
• Lock-Up Period
• Stock Options
• 409A Valuation
• Vesting