What is a Secondary Sale?

A secondary sale is the process of selling shares by existing stakeholders in a private business organization before the company’s IPO or acquisition. Investors and employees of a start-up can sell their stocks to convert them into cash. The process manages money or expands the variety of investments.

An IPO is when a company issues shares for the first time to the public, while a secondary offering is the sale of shares by current shareholders. It should be noted that in an IPO, the company proposes newly issued equity stock, while in a secondary offering, the funds go directly to the existing selling shareholders.

Existing shareholders sell their shares through an underwriter who assists in setting the price for the shares and the public offering. This method is quite similar to an IPO, but it focuses on existing shares rather than new ones.

In VC, a secondary sale refers to the active selling of shares/products in a portfolio company by investors or employees to another investor. A secondary sale in VC is an exist strategy for stakeholders and employees to allow new investors to participate in business development.

 Here are the risks and challenges in secondary sales.

• Valuation: A lot of work goes into establishing an objective value for a share in a private company.
• Liquidity: Finding a buyer for shares in a private company is challenging. 
• Regulation: These activities can also be restricted under SaaS legal and regulatory provisions applicable to subsequent sales.
• Signaling: Secondary sales strategies send different signals from the objectives to buyers.