When we talk about shares changing hands, most people think of the stock market. But what about before companies go public?
That's where private secondary markets come in – platforms that allow shareholders to convert some of their equity into cash without a full exit. They create that perfect middle ground between having all your value locked up on paper and pursuing an IPO or acquisition.
Read on as we break down what secondary markets are, how they work, and why they're becoming essential for ambitious companies with long-term growth plans.
Let's take a step back and think about how startups typically grow. You build value through your company, you secure investment, and eventually (maybe, hopefully) you exit through acquisition or IPO.
So what happens in that long middle stretch when your company is worth something on paper, but nobody can actually cash out? And what if you just don't want to either sell the company or list it publicly?
Enter secondary markets. They allow existing shareholders – your early investors, employees with equity, or founders – to sell some of their shares without the company needing to go public or be acquired.
There’s often confusion around what secondary markets truly are, as the term "secondary market" itself can actually refer to two quite different things:
So what’s the primary market then, you may ask!?
A primary market is where companies issue new shares to raise capital, like when you do a Series A round or when a company launches an IPO. The secondary market is where those already-issued shares change hands between investors.
For startups and scaleups without a stock market listing, the latter of the two – the private secondary markets – offer a happy medium between completely illiquid private equity and the demands of going public.
Secondary markets have become a big deal in recent years because companies are staying private much longer than they used to.
Back in the 1990s, successful startups might go public within four or five years. Now? It’s often 10+ years – if they go public at all. This elongated timeline is pushing businesses to create routes to unlocking liquidity.
With that said, some of the world’s most famous companies – from Burger King and Heinz to Dell and generative AI startups like OpenAI – have remained private or have moved between public and private for various reasons.
Well, while traditionally viewed as the holy grail, going public isn't always the right move.
Private companies can focus on long-term strategy without pressure to publish better and better quarterly earnings, maintaining tighter control and avoiding the potentially massive highs and lows of going public.
Many private secondary sales don’t involve any formal market whatsoever.
Instead, they’re private, one-off transactions – often facilitated directly between a shareholder and a buyer, or with the help of intermediaries such as secondary brokers or investment banks.
As companies grow, however, they can benefit from structured secondary market platforms that connect them to a wider pool of potential investors.
This is where dedicated private company trading platforms or ‘venues’ play their hand, connecting willing buyers with willing sellers through a network of regulated brokers.
Companies advertise shares through the platform to accredited buyers – typically sophisticated investors or high net worth individuals – think angel investors, VC firms, or investment banks.
Shareholders can sell through their brokerage accounts, and companies benefit from established transaction processes handled via the platform.
Once uncommon, secondary markets are multiplying, and the UK government is jumping in with their own platform, PISCES (the Private Intermittent Securities and Capital Exchange System) – a regulated trading venue for private companies set to launch in 2025.
PISCES aims to bring secondary transactions into the light, creating a more transparent, accessible way for private companies to offer liquidity to their shareholders.
Secondary transactions involve multiple stakeholders, and everyone needs legal certainty that the transaction is properly documented and valid.
‘Secondary sale’ does not mean ‘informal sale’ – there are still some established processes, laws, and regulations to follow. The bare bones of the process:
Unlike public stock exchanges, these transactions usually take weeks rather than seconds, with careful coordination needed between all parties.
Secondary markets help smooth things out, but they're still not instant like hitting "buy" on a trading app.
The two main ways to create liquidity through a secondary market are tender offers and direct secondary sales. Both involve existing shareholders selling their equity to new investors, but the structure and level of control vary.
Tender offers create a specific window where existing shareholders can sell some of their shares to investors you've selected.
Part of the beauty of tender offers is control. Companies decide the price, who can sell, who can buy, and how much can change hands. Everyone gets the same deal under the same rules.
They can be managed internally or through secondary market platforms, which handle some of the underlying mechanics.
Many companies run tender offers right after funding rounds or other company milestones. Your valuation is freshly established, you have data to support the share price, and investor interest is often buoyant, meaning buyers are easier to source.
When you're running a tender offer, secondary transaction platforms smooth out the process. They bring qualified buyers to the table, handle some compliance requirements, and manage the transaction logistics.
Direct secondary sales happen when shareholders find their own buyers on their terms. Unlike tender offers, where the company calls the shots, these deals start with a handshake between seller and buyer.
They're more flexible in timing – no waiting around for the company to organise a full-blown liquidity event.
But don't mistake flexibility for absolute freedom – most companies still have final sign-off on any transfer. After all, no founder wants random investors showing up on their cap table uninvited.
This is also where Right of First Refusal (ROFR) becomes vital. Built into most shareholders' agreements, ROFR gives your company first dibs on any shares before they go to an outside buyer.
For direct sales, secondary markets add structure to what are primarily casual handshake deals.
The platform helps connect sellers with qualified buyers, offers standardised agreements, and handles some documentation and compliance requirements.
Therefore, transactions gain legitimacy and proper documentation without needing the fully-fledged apparatus of a tender offer.
When you're setting up secondary transactions, the key is balancing liquidity with control.
Done right, you can give shareholders a way to realise value without unintended complications. But, as always, there are some snags to watch out for.
When secondary shares are sold, they don’t disappear – they simply move from one owner to another. That means new people can end up on the company’s cap table, even though the company isn’t raising any new capital.
To stay in control, most founders include transfer restrictions and a ROFR in their shareholder agreements.
To enable secondary share sales, you’ll need a share price – which means you’ll need a valuation. The valuation itself comes with some consequences attached.
In both cases, secondary pricing becomes a reference point, even if it wasn’t meant to be.
If you've set up the EMI or other share schemes for your employees, secondary sales can create early liquidity opportunities for employees with vested options or shares.
However, timing matters enormously. For tax-advantaged schemes like EMI, employees typically need to hold shares for specific periods after exercise to qualify for preferential tax rates (among other things). Selling too early could mean losing these tax benefits.
To sum up, secondary markets offer a valuable middle ground between locked-up equity and traditional exits. They allow founders to reward early supporters, motivate employees, and maintain control of their company's journey.
With all the benefits aside, executing secondary transactions requires some finesse. From cap table management to compliance – particularly when HMRC-approved share schemes are involved – the details matter.
And that's where Vestd can help. Our platform has the tools to empower you to keep on top of things, for example:
Reach out to our friendly team to learn more.
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