The secondary market, explained

Understand the function of the private secondary market and how companies can benefit from secondary liquidity and secondary market transactions.

What is a secondary market?

A secondary market is any financial market where investors buy and sell securities (like stocks, bonds, or options) from other investors, rather than directly from the issuing company. It’s “secondary” to a primary market, where securities are issued and placed into the market by an issuer in an IPO, priced fundraising round, or other initial offering. The two markets serve different purposes in a company's lifecycle, especially when it comes to raising capital and providing liquidity for shareholders. Understanding this difference is the first step to strategically managing your company's equity.

Primary market vs. secondary market

To fully grasp the secondary market, it’s helpful to understand its counterpart: the primary market.

The primary market is where securities are created and sold for the very first time. Both public and private companies can sell securities through a primary market. The most commonly known primary markets for public companies include the IPO market and the market for newly issued corporate bonds.

The secondary market, on the other hand, is where those shares are traded after their initial sale. No new shares are created in a secondary transaction. Instead, an existing shareholder, like an early employee or investor, sells their shares to another buyer. The flow of money is different, as the cash goes to the selling shareholder, not the company.

Think of it like buying a car. The primary market is like buying a brand-new car directly from the manufacturer's dealership, where the money goes to the car company. The secondary market is the entire ecosystem of used car lots and private sellers where existing car owners sell to other buyers, and the money changes hands between them.

Now that you understand the basic difference, let's look at the two types of secondary markets you'll hear about: public and private.

The public secondary market

The public secondary market is what most people picture when they hear "the stock market." It consists of organized and highly regulated stock exchanges, like the New York Stock Exchange (NYSE) or Nasdaq. On these exchanges, shares of public companies are bought and sold freely by the general public every business day, making it easier for investors to discover current market prices and decide whether to sell their holdings for cash at those prices.

This market is governed by strict rules from regulatory bodies to ensure fairness, transparency, and protection for all investors. For a startup, accessing the public market usually happens through an initial public offering (IPO), which is the complex and expensive process of becoming a publicly traded company.

The private secondary market

The private secondary market is where the buying and selling of private company shares occurs. This is the market that matters most to startup founders, their employees, and early investors before a company goes public or is acquired. It operates through specialized platforms and privately negotiated deals rather than on a public exchange.

With no centralized market infrastructure, manually matching supply and demand in the secondary market comes with certain limitations not found in the stock market. Some of those limitations include:

• Stock transfer restrictions
• No past price transparency
• Less efficient price discovery
• Extended settlement cycles (two to four weeks, or more)
• Higher administrative and operational burdens on companies

Private secondary markets tend to be more opaque, less accessible, and less liquid than public markets. Having fewer participants in a non-centralized secondary market makes it more difficult to manually match supply and demand. Despite these difficulties, the secondary market for private companies has grown significantly over the past decade.

This market provides a strategic advantage by allowing early stakeholders to achieve liquidity without waiting for a traditional exit. As the venture ecosystem has matured, the private secondary market has evolved into a primary channel for liquidity.

What is a secondary market transaction?

A secondary market transaction is when shareholders of a company sell their stock to another investor. A venture secondary transaction involves the sale of private stock in a company backed by venture capitalists. Employees are frequently among the shareholders at venture-backed companies.

Types of private secondary transactions

Once a founder sees the benefits of offering liquidity, the next question is always, "How do private secondaries actually work?" Secondary transactions take many different forms, but they can be broken down into two major groups: tender offers and direct secondary sales.

Tender offers

A tender offer is a formal, company-sponsored event where the company or a third-party investor makes an offer to purchase shares from a broad group of eligible shareholders at a predetermined price following a 20-business day period. This process is the most organized, fair, and transparent way to provide liquidity at scale.

Direct secondary sales

A private secondary sale, also called a bilateral trade or direct secondary sale, is when one investor sells shares in a company directly to another investor in a deal that isn’t initiated or sponsored by the company. These deals happen on an ad-hoc basis and are negotiated between the two parties.

Why run a secondary transaction?

While it might seem complex, a secondary transaction is an effective way to solve significant business problems. A well-executed secondary can be a win-win for you, your team, and your investors.

• Provide employee and founder liquidity: A secondary transaction allows your early employees and co-founders to realize some of the value they’ve worked hard to create before a major company exit.
• Manage investor pressure and clean up the cap table: Offering a partial exit for early investors can relieve pressure on founders to sell prematurely.
• Gain a competitive edge in hiring: In a competitive talent market, the promise of future liquidity can be an effective retention and recruiting tool.

Frequently asked questions about secondary markets

Can a company block a secondary sale?

Yes, companies can often control or prevent direct secondary sales through transfer restrictions in their bylaws or by exercising their Right of First Refusal (ROFR).

How does a secondary sale affect our 409A valuation?

A secondary transaction provides a new data point on the value of your company's stock. Your valuation provider must consider this sale price when determining your fair market value (FMV) in your next 409A valuation.