Kruze clients are twice as likely to get acquired as the average startup.  Find out why here
Kruze Consulting Navbar Logo
  • (415) 322-1610
  • Contact Us
  • Accounting & Bookkeeping
    Name
    Startup Accounting

    Maximize Your Startup’s Potential

    Name
    Startup Bookkeeping

    Services for High-Growth Startups

    Name
    Strategic Financial Accounting

    Strategic Accounting Boosts Your VC-Funded Startup’s Financial Future

    Tax Services
    Name
    Startup Tax Services

    Tax Services for VC-Backed Startups

    Name
    Startup Tax Returns

    Filing Tax Returns for VC-Backed Startups

    Name
    Delaware Franchise Tax

    Calculate Your Delaware Franchise Tax

    R&D Tax Credits
    Name
    R&D Tax Credits

    Unlock Your Startup’s R&D Tax Credit Potential

    Name
    R&D Tax Calculator

    How much can your startup save in payroll taxes?

    Advisory services
    Fractional CFO & Advisory

    VC Due Diligence

    Startup M&A Accounting

    Financial Modeling Services

    409A Valuations Services

    Part-Time CFOs Services

  • Pricing
  • Name
    About Us

    Learn more about Kruze Consulting

    Name
    Partners

    Our partners are the best in the business

    Name
    Reviews

    See what our clients say about us

    Name
    Careers

    Join our team of startup accounting experts

  • Early-Stage Tax Tips

    Guide to Seed Stage Tax Returns

    Do unprofitable companies need to file tax returns? Yes! Read our tips now.

    Guide to Seed Stage Tax Returns

    Knowledge base

    Name
    Startup Q&A

    Answers to hundreds of startup accounting, finance, HR and tax Q's

    Name
    Blog

    Expert startup accounting advice (and more)

    Name
    Case Studies

    See how we helped our clients save money and grow their businesses

    Top Financial Tips and Resources for Startups

    Name
    Startup Financial Health Tools

    Tips for setting up scaleable financial systems

    Name
    Free Financial Models

    Free to download financial models

    Name
    C-Corp Tax Deadlines

    iCals with federal, state and local compliance deadlines

    Name
    Best VC Pitch Decks

    See more of the best pitch decks ever used

    Name
    CEO Salary Report

    Data on what CEOs are paid

    Name
    Best Startup Credit Cards

    After working with hundreds of startups, we picked the best credit cards

  • (415) 322-1610
  • Contact Us
  1. Home
  2. Blog
  3. What is a Secondary Stock Transaction?

What is a Secondary Stock Transaction?

by
Kruze Consulting Kruze Consulting

Kruze Consulting

Last updated: September 18, 2024
Published: March 20, 2024

What is a Secondary Stock Transaction?

Today, we’re exploring the concept of secondary stock transactions. Despite a general slowdown in VC activity, we are still seeing some founders successfully sell shares in secondary transactions - particularly among AI companies experiencing rapid sequential funding rounds. Secondary transactions involve the sale of shares from existing shareholders, such as founders or early investors, to new or existing investors, without injecting new capital into the company itself.

Definition: Secondary Stock Transactions (or Secondaries)

A secondary stock transaction occurs when an investor buys shares directly from an existing shareholder rather than the company, contrasting with primary transactions where new shares are issued to raise capital for the company’s growth. This setup provides liquidity for shareholders while not diluting the ownership through the issuance of new shares. This contrasts with a primary transaction, where the company sells shares to the investor and the cash goes onto the company’s balance sheet for the company to use for business purposes.

Secondary: no money onto the company’s balance sheet, cash goes to an existing shareholder who sells their shares to an investor in exchange for the cash.

Primary: money goes onto the company’s balance sheet to fund operations etc., and additional shares are created and given to the investor.

Motivations behind secondary transactions

Secondary transactions offer several advantages, including providing early liquidity for founders or employees and allowing VCs access to invest in companies when new share issuance isn’t possible. These sales can also rebalance the risk and reward for founders, enabling them to secure financial stability and pursue ambitious growth strategies.

Why founders may want to do a secondary transaction

First, for founders or employees, it can be a nice source of liquidity. Maybe if you have a super successful company you can buy a house, put a down payment on something. Many founders don’t draw that much salary (see our founder salary report and our startup ceo salary report). So selling secondary shares can help a founder manage their costs and lifestyle, which is a totally normal thing to want to do in a high cost area like San Francisco or NYC.

Second, VCs will sometimes do a small secondary of the founder shares to give the founder some money and so they are more risk-seeking. It’s not uncommon for a founder to get a startup to a certain size, and then for them to realize that 100% of their net worth is tied up in the stock of that company, which can sometimes lead to risk aversion. The founder becomes afraid of messing it up, so stops taking as much risk. And since VCs love risk since it (hopefully) drives growth, letting a founder sell some secondary stock can put that founder back into a risk taking move.

Third, and this is not a great thing to have to talk about, but when a founder gets divorced this can cause issues where there is a strong desire to change up the capitalization table by letting the divorced spouse sell out of the business.

Fourth, a co-founder may depart a startup and the investors want to remove them from the cap table. Note that this really only comes together when a company is doing really well. If a company is doing poorly, then the business may get recapped in a downround, which effectively crams down the departed founder’s shares.

You also see some very late stage companies (Stripe being the most famous) who allow employees to do secondaries at the point where the employees’ stock options are going to expire.

Why VC may want to buy stock in a secondary purchase

Again, we mentioned the VCs may want to give a founder some liquidity in the hopes that it makes them more open to high risk, high reward strategies.

Secondly, a venture round may be over subscribed. In this case, a VC may be willing to purchase shares directly from an existing shareholder to get more ownership in the company - or even as a way to sneak into a round.

And, finally, there are some moments when a VC may want to sell some shares in a round - so the VC sells secondary shares to another VC! There are a few reasons for this. One is to drive DPI, which means the VC can return cash to their investors. Additionally, there are a lot of secondary sales of funds, especially for very old funds, where the fund life is winding down. There is an entire market for fund sales called secondaries where a fund just sells all their ownership positions, all their stock, and then cashes out.

Understanding rights of first refusal (ROFR)

It turns out there is something called a ROFR, or right of first refusal. Most VC firms get this in their stock purchase agreements and the articles of incorporation with the company; this means, the internal venture capitalists get the first bite of the apple. They have to waive their right to buy those secondary shares before an outside VC firm or individual can come in.

Now that’s not always the case. I believe back in the day Twitter and Facebook didn’t have that right. Or maybe, their VCs just always waived the right of first refusal; but, there were really big secondary markets in those stocks.

So remember, you typically have to get the internal VC’s permission to do a secondary sale.

This right ensures that existing investors have the chance to maintain or increase their stake in the company under the same conditions offered to outside investors.

QSBS and redemptions

Transactions where companies buy back shares from founders, followed by VCs purchasing new preferred stock, need careful handling to maintain QSBS status, affecting the tax treatment of the shares. This can happen more often that you’d think in a secondary - the VC may ask the company to purchase common from the seller, then the VC buys shares from the company. Again, talk to your tax team, as redemptions can cause QSBS issues.

Selling founder shares in funding rounds

While direct sales of founder shares to VCs during funding rounds are less frequent today, they provide an essential liquidity option. This process allows founders to realize some financial gains without waiting for a company exit or public offering.

How to approach your vc about selling shares

Engaging in a conversation with your VC about selling shares requires tact, transparency, and timing. Here’s a guide to navigating this discussion:

  • Preparation: Understand the terms of your existing agreements, particularly any clauses related to share sales or ROFR.
  • Reasoning: Clearly articulate your reasons for wanting to sell shares, whether it’s for personal financial security etc..
  • Timing: Choose an opportune moment, usually best when you are pulling together a hot funding round or after a significant company milestone, to show continued commitment to the company’s success.
  • Proposal: Present a structured plan on how many shares you wish to sell, ensuring it doesn’t signal a lack of confidence in the company’s future.
  • Negotiation: Be open to feedback and ready to negotiate terms that align with both your interests and those of the VC and the company. Remember that common stock is usually worth less than preferred shares!

In the current venture capital climate, understanding and leveraging secondary stock transactions is more crucial than ever for startups looking to navigate financial complexities. For personalized assistance and to ensure your startup is well-prepared for venture capital engagement, consider leveraging our VC due diligence checklist, crafted from extensive experience in aiding clients through their funding processes.


Contact Us for a Free Consultation

Get the information you need


Previous Post
What is Pay to Play in Venture Capital?
Next Post
Can You Lose Money if You Sell Treasuries Early?

Startup CEO Salary Calculator

US Based Companies that have raised under $125M

  Redirecting to results  

Top Articles

  • Pre-Seed Funding + Top 20 Funds
  • eCommerce Accounting
  • Accounts Receivable Loans
  • What is the 2% and 20% VC fee structure?
  • How much does a 409A valuation cost?
  • What are Your VC’s Return Expectations Depending on the Stage of Investment?
  • Fractional CFOS
Kruze on X
Email Us
RSS

How much can your startup save in payroll taxes?

Estimate your R&D tax credit using our free calculator.

r&d tax calculator

Signup for our newsletter

   

Popular pages

  • SaaS accounting 101
  • Best accounting software
  • Top banks for startups
  • How to account for convertible note
  • Average CEO Pay
  • Startup Tax Returns
  • Best VC Pitch Decks
Related content:
What does additional paid-in capital (APIC) mean for startups?
Sun, 22 December 2024
Closing the Deal: The Final VC Meeting
Wed, 21 August 2024
What is the 2% and 20% VC fee structure?
Mon, 12 August 2024
How to Handle a Co-Founder Departure
Wed, 18 September 2024
Also read:
A Guide to Startup 409A Valuation

A Guide to Startup 409A Valuation

Learn the essential startup valuation methods including DCF, Berkus, Scorecard, and more. Understand why valuations are crucial for fundraising, stock options, and strategic decisions. Get expert insights from Kruze Consulting to navigate the complex process of valuing your startup.
Tue, 27 May 2025
Startup Venture Capital Assistance: Financial Strategies for Success

Startup Venture Capital Assistance: Financial Strategies for Success

Kruze Consulting provides expert finance and accounting services for funded startups seeking venture capital. Learn about VC funding, due diligence, financial modeling, and more. Our team has helped startups raise over $15 billion. Get outsourced FaaS and prepare for your next funding round with Kruze Consulting.
Mon, 5 May 2025
Tips for founders to discuss salary with VCs

Tips for founders to discuss salary with VCs

Learn how startup founders and CEOs can effectively discuss salary with VCs. Get expert tips on timing, preparation, negotiation, and aligning your needs with investor expectations.
Wed, 30 April 2025
Startup Valuations in 2024

Startup Valuations in 2024

As the leading CPA firm serving VC-backed startups, we are acutely aware of the trends in startup funding - including valuation trends.
Mon, 26 August 2024

Kruze is a leader in accounting services for startups

With over $10 billion in funding raised by our clients, Kruze is a leader in helping funded startups with accounting, tax, finance and HR strategies.

Thank you!

✅ Your request has been submitted.
We will contact you shortly.

Enter your name
Enter Company name
Enter Phone number
Enter Email
Enter Message
 
By clicking Contact Us, you consent to receive automated messages from Kruze Consulting. Reply STOP to opt out. Terms of Service | Privacy Policy.
  • VC Tips

  • VC Pitch Deck Templates
  • Startup Pitch Deck Course
  • Pre Seed Funds
  • Startup Financing 101
  • Kruze Reviews
  • How VCs Think

  • VC Return Expectations
  • Where VCs Get Their Money
  • How much VC to Raise
  • What is a VC Capital Call?
  • VC Due Diligence Checklist
  • Early-Stage Securities

  • Typical VC Securities
  • Convertible Notes
  • Convert Accounting
  • SAFE Note Accounting
  • Option Pool 101
  • Interacting with VCs

  • Startup Investor Update
  • VC Information Rights
  • Due Diligence Checklist
  • Right of First Refusal
  • Startup Runway Calculator

Kruze Consulting Logo Kruze Consulting

Kruze Consulting is a licensed CPA firm; California Board of Accountancy license number 7637

  • Team
  • Pricing
  • Careers
  • Kruze News
  • Reviews
  • Contact Us
  • Security
  • Privacy Policy
  • Terms of Service

Copyright © Kruze Consulting 2025

We may monetize some of our links through affiliate advertising. At any moment, executives or team members may own public or private stock in any of the third party companies we mention.

Do Not Sell or Share My Personal Information

Resources

  • Startup Resources
  • Startup Q&A
  • Case Studies
  • Kruze Blog
  • C-Corp Tax Deadlines
  • Startup Accounting Dictionary

Free Tax Calculators

  • Startup R&D Tax Credit Calculator
  • How Much Does a Startup Tax Return Cost?
  • Delaware Franchise Tax Calculator
  • Burn Rate and Cash Runway Calculator

Startup Tips

  • Startup Expense Management 101
  • 10 Best Banks For Startups in 2025
  • Startup Payroll
  • Best Accounting Software for Startups
  • Startup Tax Compliance
  • How to Pay International Employees & Contractors
  • Startup Bill Pay Service

Locations

  • Austin
  • New York City
  • San Francisco
  • San Jose
  • Santa Monica

Social Media

  • Kruze Consulting on Youtube
  • Kruze Consulting on LinkedIn
  • Kruze Consulting on Twitter
  • Kruze Consulting on Yelp

Industry Expertise

  • SaaS Accounting
  • Biotech Accounting
  • AI Startup Accounting
  • eCommerce Accounting
  • Hardware Accountants
  • CPG Accountants
  • Crypto Accounting
  • Healthcare Accounting
  • Startup Accounting
  Talk to a leading startup CPA
  • Is the content on this page useful?

Thank you!

Your feedback is very important.

READY TO CONNECT FOR A FREE CONSULTATION?

We are the experts at helping seed/VC-backed Delaware C-Corps with their accounting and finances!

Talk to an experienced accountant, not a generic sales person

Alex Janeck Kruze Consulting
Alex Janeck
Edith Silva Kruze Consulting
Edith Silva
Will Martin Kruze Consulting
Will Martin
Viz AI

$250M+ VC Funding Raised


"I had a great experience working with Kruze Consulting when we raised Series A. They know what VCs need to see, and how to present a startup’s books and finances. If you are going to raise venture capital, you need experts like Kruze."
Chris Mansi

Chris Mansi

CEO

Startup Venture Capital Assistance

With former venture capitalists on staff, our team is here to help you navigate the fundraising process and manage your board of directors

Vanessa Kruze Kruze Consulting
Vanessa Kruze
Founder & CEO, CPA
Alex Janeck Kruze Consulting
Alex Janeck
VP of Revenue
Pequity

Scale Remote Operations & Team


"Kruze has supported us above and beyond basic accounting needs by ensuring we have everything we need to expand and support our team wherever they may be located"
Zack Fisch

Zack Fisch

Head of Operations & Legal

Clients who have worked with Kruze have collectively raised over $15 billion in VC funding.

We set startups up for fundrising success, and know how to work with the top VCs.

Vanessa Kruze, CPA Kruze Consulting
Vanessa Kruze, CPA
Founder & CEO
Kruze Logo

Experienced team helping you

Our account management team is staffed by CPAs and accountants who have, on average, 11 years of experience.

Bill Hollowsky, CPA Kruze Consulting
Bill Hollowsky, CPA
VP of Accounting Services
Claudine Vantomme, CPA Kruze Consulting
Claudine Vantomme, CPA
Controller
Morgan Avery Kruze Consulting
Morgan Avery
SUT/R&D Sr. Tax Accountant
Beth Bassler Kruze Consulting
Beth Bassler
Controller, CPA
Protara Therapeutics

Grew from a 2-person startup to a NASDAQ listed public company.


"The Kruze team helped us grow from a 2-person startup to a NASDAQ listed public company in 2 years. We wouldn’t have gotten public without Kruze’s support. Anyone thinking of launching a startup should make Vanessa their first call!"
Jesse Shefferman

Jesse Shefferman

CEO

Kruze Logo

Get in Touch

Please help us connect with you

How can we reach you?

Our first response is typically via email, so please check your inbox.

By clicking Next, you consent to receive automated messages from Kruze Consulting. Reply STOP to opt out. Terms of Service | Privacy Policy.

Help us have a productive first consultation by providing some additional information.

What year was your startup incorporated?

What is your stage of funding?

(pick up from the list)

Approximately how much funding have you raised?

(please enter a dollar value such as 5000000)

Help us understand what you are looking for:

(Optional, click the ones you need)

Anything additional that you’d like to share?

Optional - if you’d like to share anything else to help us prepare for our consultation, please let us know. We are also happy to sign an NDA, just let us know.

Loading search...

Initializing search...

Search

Recent searches: