TRC 011: Secondary share sales. A founder's guide.

Read time: 4 mins

Nothing in startup world tends to divide opinion quite like secondary share sales by founders.

In this scenario a secondary sale is one where the funds of the share sale don’t go to the company but to the founder.

I am generally in favour of secondary sales where certain conditions are met that ensure the alignment of interests.

If you are a founder, it’s helpful to understand these if you want any chance of a secondary sale in the future:

1. Milestone Mastery: The company should have achieved significant early milestones. Don’t think product delivery will be enough.

   Investors will need to see strong commercial traction based on going above and beyond the objectives you set.

2. Lock-in Logic: There has to be legal commitment for the founder to stick around, creating a quid pro quo.

   There are several strategies to achieve this, but you should certainly expect to be re-vesting a reasonable proportion of your remaining shares.

3. Small proportion: Don’t expect to sell half your shares.

   Investors want to make sure your shareholding remains enough to incentivise you in the future and to convince future investors that your commitment will remain strong.

   This also relates to the next condition.

4. Amount matters: The money involved should be enough to cover to make sure a founder can take care of the basics, but it is not enough to make sure that they lose interest in what they are doing.

   This will vary by location and personal circumstances, but don’t expect multiple millions.

5. Time in the Trenches: Founders should already put in the hard yards. Most secondary sales I see happen after 5 years or more.

6. Potential for greater growth: The company must have clear potential for significant growth in the future.

   This is the incentive for the VC to invest more capital and for founders to earn money.

   It's not a gift; it's a calculated risk with the hope of future rewards.

7. Key Employees: Founders should also be the key employees going forward.

   Only those delivering value can take money off the table.

   It's not charity; it's about aligning incentives.

8. Sufficient Capital: Secondary sales only typically happen where there is more money on the table than the company needs.

   No investor is going to approve a sale that enriches founders when the company is not sufficiently capitalised.

All of these conditions can go out the door when you have created something so hot, that is growing so fast that Venture Capital partners are fighting each other outside your office door to be first through it.

Similarly, if you have been through an exit before and aren’t struggling on the financial front, investors are likely to look less kindly on a secondary sale.

If you are thinking about the potential of a secondary sale in the future, it’s good to know what might make it possible.

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