Secondaries and Tender Offers: How Private Shareholders Get Liquidity

Companies that once listed within seven or eight years of founding now routinely stay private for well over a decade. The equity system was not redesigned to match.

An employee granted options in year two, fully vested by year six, may still be holding illiquid paper in year fourteen — having possibly paid to exercise and paid tax on a gain they never realised. Early angels sit on marks they cannot bank. Seed funds reach the end of a ten-year fund life holding positions in companies that are still growing.

Secondaries are the market's answer. This guide covers the forms they take, the restrictions that govern them, the tax and valuation consequences, how a tender actually runs, and how to think about selling or buying.

1. The Four Forms

Company-run tender offer

The company organises a liquidity event: a buyer — usually a new or existing investor — offers to purchase shares from employees and early holders at a set price, in a defined window, with defined eligibility.

This is the cleanest form by a wide margin. The company controls who sells, how much, to whom and at what price. It is administered properly, frequently through a transfer agent, and it comes with real disclosure. Increasingly common alongside a primary round, where a new investor takes some primary shares and some secondary.

Individual secondary sale

A shareholder sells directly to a buyer. Requires company cooperation, because of transfer restrictions and rights of first refusal, and companies often decline.

Structured secondary and forward contracts

Various instruments exist that give a shareholder cash now in exchange for future proceeds without transferring the shares immediately — forward sales, prepaid variable forwards, and loans against the position.

Approach these with real caution. Many companies prohibit them explicitly, since they are designed to route around transfer restrictions. Some carry recourse, meaning if the shares end up worth less than the advance you may owe money. Others have adverse tax treatment. Read the documents carefully and take advice specific to your situation.

LP secondaries

An entirely different market: limited partners selling their commitments in venture and private equity funds. Driven by liquidity needs, portfolio rebalancing and the extended time to distributions. Includes GP-led continuation vehicles, in which a manager moves assets into a new vehicle so existing LPs can exit while the manager continues to hold. Relevant to anyone investing as an LP — our guide to fund economics explains why fund life creates the pressure.

2. Why You Probably Cannot Just Sell

Private company shares are not freely transferable, and the restrictions are layered.

• Securities law. Shares acquired in private transactions are restricted securities. Reselling generally requires Rule 144 conditions to be satisfied, including a holding period, or another exemption. See our guide to private offering exemptions.
• Right of first refusal. The company, and often its investors, may match any offer you receive. In practice this deters buyers, who dislike doing diligence and negotiating a price only to be pre-empted.
• Company consent. Many stock agreements and bylaws simply require board approval for any transfer. Boards decline routinely.
• Co-sale rights. Investors may have the right to participate in your sale pro rata, reducing how much you can sell.
• Contractual prohibitions. Some agreements prohibit transfers outright until an exit.

Read your stock purchase agreement, option agreement, bylaws and any shareholders' agreement before assuming you can sell anything. Attempting a transfer in breach can void the sale and, in some cases, trigger forfeiture.

3. Why Companies Run Tender Offers

• Retention. An employee eight years in, fully vested and financially stretched, is a flight risk. Partial liquidity resets that.
• Recruiting. A track record of periodic liquidity makes an equity offer credible to candidates who have heard the stories.
• Control. Better a structured event on the company's terms than a diffuse grey market with unknown buyers appearing on the register.
• Early investor pressure. Seed funds approaching end of life need distributions, and a tender resolves that without forcing a sale of the company.
• Price discovery ahead of a listing.

What companies must handle carefully

• Disclosure. Employees being asked to sell need enough information to decide. A company that runs a tender while withholding materially positive news is creating serious legal exposure.
• Tender offer rules. Broad-based offers to employees can implicate SEC tender offer requirements, including timing and equal-treatment obligations. This is specialist legal territory.
• Tax and withholding. Selling shares acquired from options can create compensation income requiring payroll withholding, depending on the facts.
• Eligibility rules — who may sell and how much — must be applied consistently. Caps of 10% to 25% of vested holdings are common.

4. How a Tender Actually Runs

For a company doing this the first time, the process is longer than expected — typically three to five months from decision to settlement — and most of the elapsed time is legal and administrative rather than commercial.

Finding the buyer. Usually an existing investor wanting more ownership, a new investor taking a position alongside a primary round, or a dedicated secondary fund. The buyer's appetite sets the size, and the size determines how much each seller can actually sell once demand is allocated.

Setting the price and eligibility. The board approves both. Price is normally at a discount to the last preferred round for the reasons set out below. Eligibility rules — minimum tenure, vested-only, a cap as a percentage of holdings, sometimes a minimum and maximum dollar amount — must be objective and applied uniformly, because inconsistent application is where disputes originate.

Preparing disclosure. This is the part companies underestimate. Employees deciding whether to sell need current financial information, and the company needs to be confident it is not sitting on undisclosed material information. If a large customer is about to churn or a term sheet is about to land, that has to be resolved before the window opens.

The offer window. Typically twenty business days for broad-based offers, during which eligible holders receive the documents, make an election and sign. Expect a heavy concentration of questions in the first three days and the last two.

Allocation and settlement. If elections exceed the buyer's capacity, shares are usually cut back pro rata. A transfer agent or the administrator then processes the transfers, updates the register and settles funds. Payroll handles any withholding.

Afterwards. Commission a fresh 409A promptly, and communicate clearly to employees who did not sell about when the next window might be. Silence after a tender generates more anxiety than the tender resolved.

5. The 409A Consequence

This one is routinely underestimated by companies.

A tender offer at an observable price is strong evidence of the fair market value of common stock, and it is generally a material event that ends your existing valuation's safe harbour.

The practical effect: your next 409A valuation will move toward the tender price, and every option granted afterwards carries a higher strike price. New employees get a less valuable grant than the people who just sold.

That is a genuine trade-off, not a reason to avoid tenders — but it should be modelled before you commit, and it should inform grant timing around the event.

6. The Tax Position

Specific to each holder, but the recurring points:

• Holding period. Long-term capital gains treatment generally requires more than a year from acquisition — which for options means from exercise, not grant.
• The QSBS trap. Section 1202 requires stock acquired at original issuance. A buyer purchasing on the secondary market does not get QSBS, no matter how qualified the stock was for the seller. This materially affects what a sophisticated buyer will pay, and sellers should understand that their own Section 1202 benefit may be worth more than the discount they are being offered.
• Selling before five years forfeits QSBS on those shares. Selling part and holding the rest is frequently the right answer.
• Compensation versus capital treatment. Depending on the structure, some proceeds may be treated as compensation income rather than capital gain — particularly where the company facilitates the sale.
• State tax follows your residence, and several states do not conform to Section 1202.

7. Pricing and the Discount

Secondary shares almost always trade at a discount to the last preferred round price, frequently a substantial one. That is rational, not predatory:

• You are usually selling common stock, which lacks the liquidation preference and protective rights attached to preferred
• The buyer has limited information relative to a primary investor
• The position is illiquid and the exit timing unknown
• The buyer forgoes QSBS eligibility
• Buyers rarely receive information rights

The right comparison for a seller is not the preferred price. It is cash today against an uncertain amount at an unknown future date, adjusted for the concentration risk of holding a large share of your net worth in one private company.

Frequently Asked Questions

Should I sell some of my shares?

A reasonable framework: sell enough to remove genuine financial pressure and reduce dangerous concentration, keep the majority of the upside. Founders selling a modest portion in a tender is now normal and is not read as a negative signal. Selling a large majority is read as a signal, and correctly.

Will the company find out if I sell privately?

Yes. Transfers require company action to be recorded, and an unrecorded transfer is not effective. Attempting to sell in breach of your agreements can void the sale and damage your position materially.

What is a forward contract and should I use one?

An arrangement giving you cash now against future proceeds without transferring shares immediately. Many companies prohibit them, some are recourse — meaning you can owe money if the value falls — and the tax treatment can be unfavourable. Get independent advice before entering one, and check your own documents first.

How do secondary marketplaces work?

Several platforms match private-company buyers and sellers, and some operate as registered broker-dealers. They can only complete a transfer that the company permits, so their practical usefulness depends entirely on the issuer's stance. Verify registration and understand the fee structure on both sides.

Can early investors sell in a tender?

Frequently yes, and it is often the reason the tender exists — a seed fund at the end of its life needs distributions. Companies typically prioritise employees, then early angels, then funds, with allocation rules applied consistently.

What if I have exercised options but never sold — am I in a worse position?

Usually a better one, with a caveat. You have started the capital gains holding clock and, if the shares were qualified at issuance, potentially the QSBS clock too, so a sale may be taxed more favourably than one by someone exercising and selling in the same transaction. The caveat is that you have already paid the exercise cost and possibly AMT on a paper gain, which is precisely the exposure a tender lets you unwind. Model both the tax outcome and how much of your net worth remains in the position.

How often do companies run tenders?

There is no norm, and that is the honest answer. Some large private companies have settled into an annual or eighteen-monthly rhythm; many run one opportunistically alongside a primary round and never repeat it. What matters when you are joining a company is not a promise but a track record — ask whether they have run one, when, and who was eligible. A company that has done it twice is telling you something a policy document cannot.

Can I sell if I have left the company?

Sometimes, and it depends entirely on your documents and the company's rules for that tender. Some companies restrict participation to current employees; others include former employees who exercised and still hold shares. Separately, check whether your post-termination exercise window has expired — a substantial number of former employees discover they no longer hold anything to sell. Our guide to what employee equity really costs covers that trap.

What does a buyer actually diligence in a secondary?

Far less than a primary investor, which is part of why the discount exists. A secondary buyer typically sees the cap table, headline financials and the last round's terms, and rarely gets information rights afterwards. They are underwriting the company's trajectory largely from the outside. Where a buyer is an existing investor with board access, the information asymmetry runs the other way — which is a reason for sellers to think carefully about a price set by someone who knows more than they do.

Does a tender affect our next funding round?

Not adversely in most cases, and it can help by demonstrating investor demand at a known price. What it does change is the reference point: a new investor now sees a common stock price alongside your last preferred price, and will use both. It also resets your 409A, which affects the strike price on every grant you make while raising. Sequence the two deliberately rather than letting the timing fall out by accident.

The Bottom Line

Read your transfer restrictions before you plan anything. Prefer a company-run tender to any private arrangement. Model the tax position, including what selling early does to your QSBS. And if you are running a company, understand that a tender resets your 409A and changes the value of every grant that follows.

Global Capital Network connects shareholders, funds and buyers across private markets. Get in touch or see upcoming events.

This article is general information, not legal, tax or investment advice. Secondary transactions raise securities, tax and contractual issues specific to your documents. Take advice before selling.