Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / Why VCs Are Buying Secondary Shares Before the IPO
Transcript
- Lucas: So there's this number that's been stuck in my head for a couple of weeks — the global market for secondary-share sales in private companies has roughly doubled since 2023. We're talking about employees and early angels selling their stock to outside investors before the company ever goes public. Luna: And this is happening before the IPO, not after. So it's like a mini-exit for the people who got in early. Lucas: Exactly. And the scale is getting hard to ignore. Firms like Forge Global and SharesPost, which run these secondary marketplaces, are reporting transaction volumes that are up something like forty percent year-over-year just in the first quarter of this year. Luna: What's driving it? Is it just that companies are staying private longer, so people need a way to cash out? Lucas: That's part of it. The average time from founding to IPO has stretched to around eleven years now, compared to maybe four or five back in the late nineties. But there's something else happening — the buyers on the other side of these trades are getting more aggressive. I'm talking about big crossover funds, like Coatue and Tiger Global, that used to only buy primary shares in funding rounds. Now they're building whole teams dedicated to sourcing secondary deals. Luna: Right, because if you're a late-stage fund and you want to build a position in a company that's not issuing new shares, secondaries are the only way in. Lucas: Bingo. And the pricing is interesting. In a typical secondary transaction, the shares trade at a discount to the most recent primary round valuation — maybe ten to twenty percent off, depending on how hot the company is. But I've seen deals in the last six months where strong companies like Stripe or SpaceX have secondaries trading at a premium to the last round price. Luna: That's a signal. If buyers are willing to pay more than the last round valuation, they're basically saying the company is worth more than the official number. Lucas: And it creates weird incentives for founders. Say you're running a company that's doing well, and your early employees are sitting on options that are now worth real money. But the company isn't ready to go public — maybe the revenue growth is strong but you want to wait for a better market window. The secondary market becomes a release valve. Luna: But doesn't that also let the founders and VCs off the hook? I mean, if employees can sell on the secondary market, there's less pressure to actually go public. Lucas: That's the critique. Some argue that a liquid secondary market actually delays IPOs, because the big institutional shareholders don't feel the same urgency to create a public exit. And the data kind of supports that — we've seen the number of tech IPOs stay relatively flat over the past few years even as the secondary market has exploded. Luna: So the employees might get liquidity, but the broader public never gets a chance to invest? That seems like a downside. Lucas: It depends on your perspective. The companies that do go public tend to be more mature and have better disclosure practices because they've had to manage a shareholder base that includes sophisticated secondary buyers. So the quality of IPOs might actually improve. Luna: Let's talk about a specific deal. There was a transaction last month involving a well-known AI company — I think it was an eight-figure block of shares changing hands. Can you walk us through that? Lucas: Sure. There's a case I looked at — a company we'll call 'Company X' to avoid getting too specific — but it's a generative AI startup that raised its Series B at a three billion dollar valuation in early 2025. By late 2025, a secondary block of about sixty million dollars traded at a valuation of roughly four point two billion. That's a forty percent premium in less than a year. Luna: Who sold? Was it early employees? Lucas: In that case, it was a mix — some early employees and a seed-stage VC firm that wanted to return capital to its limited partners. The buyer was a multi-stage hedge fund that couldn't get allocation in the primary rounds because the company was oversubscribed. So they paid up for the secondary shares. Luna: And that's happening more and more. The big funds are basically saying, 'We don't care if it's primary or secondary — we want exposure.' Lucas: Right. And there's a structural reason for that. Many of these crossover funds have billions in assets under management, and they need to deploy capital in concentrated positions to move the needle. A secondary block of fifty or a hundred million dollars is actually a very efficient way to build a meaningful stake. Luna: What about the risk? If you're buying secondary shares, you're not getting the same protections as a primary investor — no information rights, no board observation, no pro-rata rights for future rounds. Lucas: That's the trade-off. Secondary buyers typically get fewer contractual rights. But they also get a discount — or at least they used to. In the current market, with so much capital chasing private tech, some secondary trades are happening at flat or even premium prices. So you're paying more for less protection. That's a bet on continued momentum. Luna: It feels like the private market is becoming more like the public market, just with less transparency. You have continuous trading, price discovery, and institutional players — but no SEC filings, no quarterly earnings calls. Lucas: And that's exactly what regulators are starting to look at. The SEC has floated the idea of requiring more disclosure from companies that have active secondary markets, even if they haven't gone public. So far it's just discussion, but it's a sign that this market has grown big enough to attract attention. Luna: Do you think secondary markets will eventually replace IPOs for a lot of companies? Lucas: Not entirely. An IPO still gives a company a currency for acquisitions and a way to compensate executives with liquid stock. But I think we'll see more companies use the secondary market as a staging ground — build a shareholder base of institutional investors through secondaries, then do a smaller IPO later, or even skip the IPO entirely and use a direct listing or a SPAC. Luna: It's almost like the exit is becoming a process rather than an event. Lucas: That's a good way to put it. And for founders, that creates new strategic questions. When do you let employees sell? Do you cap the percentage of shares that can be traded in secondaries? Some companies are now adopting policies that limit secondary sales to, say, ten percent of outstanding shares per year, to prevent too much ownership from leaking out before a public offering. Luna: And then there's the tax angle. Secondary sales can trigger tax events for employees — sometimes at ordinary income rates if the options weren't exercised early. That can be a nasty surprise. Lucas: Absolutely. There's a well-known story from a few years ago where an early employee of a ride-sharing company sold shares in a secondary transaction and ended up with a six-figure tax bill because they hadn't filed an 83 election. The secondary market creates liquidity, but it also creates complexity. Luna: If today's episode was useful to you and you want to keep it ad-free, buy me a coffee dot com slash fexingo helps. Lucas: Yeah, that's literally what keeps these conversations going — listener support, no ads, no sponsors. So if it's worth something to you, that's the place. Luna: And we're back. So where do you see this heading in the next twelve months? Lucas: I think we'll see more companies creating formal secondary programs — like a semi-annual tender offer where employees can sell a portion of their shares at a price set by the board. That gives the company more control over who buys and at what valuation. Companies like SpaceX have done this for years. Luna: And that also helps with retention, because employees know they'll have a chance to sell eventually. Lucas: Exactly. The old model was 'wait for the IPO and hope it happens.' The new model is 'you'll get liquidity at some point, but we control the timing.' It changes the conversation between founders and their teams. Luna: One thing I'm watching is whether the big secondary marketplaces — Forge, EquityZen, Zanbato — will eventually consolidate. There are maybe a half-dozen major platforms, but the market is still fairly fragmented. Lucas: Consolidation feels inevitable. The winner will be the platform that can offer the most liquidity and the best price discovery. And that might end up being a business that gets acquired by a big exchange, like the New York Stock Exchange or the NASDAQ, who want to capture private-market activity before companies go public. Luna: That would be a full-circle moment — the public market infrastructure absorbing the private market infrastructure. Lucas: It would. And it would also mean that the line between public and private investing gets even blurrier. For the listener who's building a company or thinking about joining a startup, the implication is clear: your equity might be worth something long before an exit event. But you need to understand the rules of the secondary game — taxes, restrictions, pricing — or you could leave real money on the table. Luna: Or end up with a tax bill you didn't expect. Lucas: Right. So talk to your accountant, talk to your lawyer, and pay attention to the secondary market. It's not just a Wall Street thing anymore — it's becoming part of the standard startup journey.