Secondary Sales: When and How Founders Can Sell Shares

Founder liquidity — selling some of your shares before an IPO or acquisition — has become a more normalized part of the late-stage startup ecosystem. What was once considered a sign of a founder losing faith in their company is now treated more pragmatically: a founder who has taken enough money off the table to be financially secure often makes better decisions than one who is entirely dependent on the exit.

But the mechanics, signaling implications, and tax treatment are complex enough that most founders get to Series B or C without having a clear picture of how secondary transactions actually work.

How Secondary Transactions Work

In a primary round, the company sells new shares and receives the cash. The share count increases; existing shareholders dilute.

In a secondary transaction, an existing shareholder (a founder, early employee, or early investor) sells their existing shares directly to a buyer. The company issues no new shares; the company receives no cash. Ownership transfers between individuals.

The buyer in a secondary transaction is typically:

• A lead investor in the primary round who wants to acquire additional shares at a lower blended price
• A dedicated secondary fund (like Lexington Partners, Greenspring Associates, or smaller European secondary specialists)
• A new investor who couldn't get enough allocation in the primary round
• Another existing shareholder exercising a right of first refusal on departing shares

Founders almost never arrange secondaries independently. They happen in the context of primary rounds, with investor consent, or through formal tender offer processes organized by the company.

When Investors Allow It

The right to sell secondary shares is typically governed by your shareholders' agreement. Common restrictions:

Right of first refusal (ROFR): Existing shareholders (often investors) have the right to buy your shares at the price you've negotiated with a third party before you sell to that third party. This effectively limits your ability to find independent secondary buyers.

Co-sale rights (tag-along): If you sell a significant block, other shareholders may have the right to sell alongside you at the same price and terms.

Company consent requirements: Many shareholder agreements require board or investor approval for any secondary sale.

Lock-up periods: Particularly post-IPO, founders typically face 6–12 month lock-up restrictions.

In practice, secondary sales for founders are most commonly permitted in two contexts: within a large primary round where the lead investor agrees to purchase some founder shares as part of the package, or through a formal tender offer organized for the whole company.

Series A and B investors are generally comfortable with founders taking modest secondary ($500K–$2M range) if the company is doing well and it's a small percentage of total holdings. Series C and later, larger secondary amounts become more common and more expected.

Tender Offers vs Direct Secondaries

Tender offer: The company (or sometimes a large investor) makes an offer to all eligible shareholders to buy their shares at a specified price. This is typically used for larger liquidity events — a "pre-IPO liquidity" for employees and founders. Participation is optional.

Tender offers are formal, expensive to organize (legal fees, compliance requirements, shareholder communication), and typically happen at growth-stage companies preparing for an IPO or as part of a large late-stage primary.

Direct secondary (primary round secondary): More common at earlier stages. The new lead investor agrees to purchase, say, $1M of founder shares as part of the overall investment package. The transaction is agreed privately, subject to ROFR and consent procedures.

This is simpler and more common at Series B/C. The lead investor often welcomes it — it can be a way to increase their total stake in a company where the primary round was oversubscribed, buying shares from founders rather than competing for primary allocation.

Tax Implications for European Founders

Tax treatment varies significantly by country and holds founders back from pursuing secondary liquidity when it would otherwise make sense.

Netherlands: Capital gains on shares held by a director/major shareholder (more than 5% in a BV) are taxed under Box 2 income tax at 24.5% on the first €67K and 31% above that (2024 rates). Favorable compared to income tax but the timing matters — tax is due in the year of the sale regardless of whether you've received cash (relevant for escrowed consideration).

UK: Capital gains tax on share sales is 20% for higher-rate taxpayers (plus any applicable BADR / business asset disposal relief, which can reduce it to 10% on qualifying gains up to £1M lifetime). EIS/SEIS shares held for 3+ years may qualify for additional relief.

Germany: Capital gains on share sales are generally subject to the 25% Abgeltungssteuer (withholding tax on investment income) plus surcharges, making the effective rate ~26.4%. For founders who have held shares long-term, there may be an exemption for gains on shares in a German GmbH/AG if conditions are met — this requires specific tax advice.

Cross-border complications: If you've relocated from one country to another since founding, exit taxes and treaty provisions between countries can complicate the tax treatment substantially. Dutch exit tax provisions, for example, may apply if you relocate to a lower-tax country and subsequently sell shares.

Get country-specific tax advice before completing any secondary transaction. The difference between the right and wrong structure or timing can be material.

How to Negotiate Secondary in a Primary Round

If you want to take some secondary in an upcoming round, the right approach:

1. Don't lead with it. Establish the primary round terms first. Raising the secondary question before the valuation is agreed looks like prioritizing personal liquidity over company outcomes.

2. Frame it correctly. The conversation is: "As part of this round, I'd like to explore whether there's appetite for some secondary — both to provide founder stability and potentially to allow [lead investor] to increase their overall position." This frames it as potentially aligned with investor interest.

3. Keep it proportional. Selling 5–10% of your holdings is viewed very differently than selling 30%. Large secondaries signal something about founder conviction regardless of how they're framed.

4. Expect a haircut. Secondary transactions in illiquid private companies typically price at a 10–30% discount to the primary round price, reflecting the liquidity premium and the buyer's negotiating position.

5. Prepare for disclosure. Any material founder secondary sale will typically be disclosed in round documentation. Co-investors and employees may learn about it.

Advisors who've been through growth-stage rounds — the kind available through platforms like Founderboard — can help founders calibrate what's normal to ask for at a given stage and how to have that conversation with their lead investor without damaging the broader relationship.