How a secondary deal actually works

Almost every secondary deal begins with a seller-side trigger, not a buyer-side one. The most common: a founder or early employee needs cash for a life event (a house, taxes on a vesting cliff, a divorce settlement); an early investor's fund is approaching the end of its life and needs to return capital to its own LPs; or a later-stage fund wants to rebalance a concentrated position built up across several rounds. See use casesfor the full list.

The trigger determines urgency, which in turn shapes almost everything downstream: a seller under time pressure (an approaching tax deadline, a fund winding down) will typically accept a steeper discount for certainty and speed than one who can wait for the best offer.

Unlike a public market, there's no order book. A seller — or their broker, or a secondary marketplace — has to actively find a buyer, and vice versa. This happens through a handful of channels: specialist secondary marketplaces and brokers who maintain buyer networks; direct outreach to the company's existing investors, who often have both the context and the capital to buy more; and, for institutional-sized blocks, dedicated secondary funds and fund-of-funds that specialize in buying LP stakes or direct positions.

Company involvement often starts here too — many companies maintain an approved list of buyers or a preferred marketplace partner specifically to keep unfamiliar parties off the cap table. See the buyer & fund directory for who these specialist buyers and marketplaces actually are.

A buyer moving forward needs enough information to price the position, but secondary buyers typically get far less access than a primary investor negotiating directly with the company — no board seat, no negotiated information rights, sometimes not even a current cap table. Diligence usually covers: the company's most recent priced round and any interim data points (bridge notes, internal marks); the specific security being sold (common vs. preferred, and what rights attach); and any known company-level risk (an active fundraise at a lower price, pending litigation, a restructuring).

Valuation is then set relative to that last round, adjusted for the information gap and illiquidity the buyer is taking on — which is why a discount is the default assumption, not the exception. See the typical discount range.

This is the step that kills the most deals. Nearly all startup stock comes with transfer restrictions written into the company's bylaws, the investor rights agreement, or the original stock purchase agreement. Two mechanisms usually apply:

• Right of first refusal (ROFR): before a seller can transfer shares to a third party, the company (and sometimes existing major investors) must be offered the chance to buy the shares themselves, on the same terms.
• Company consent: even after a ROFR is waived, many agreements require the company's board or management to formally approve the specific buyer before a transfer can register.

Companies use this leverage for reasons beyond gatekeeping troublesome buyers — it lets them manage their 409A valuation exposure, keep the cap table clean ahead of a future round or IPO, and in some cases redirect the sale to buyers they'd prefer to have as shareholders.

Once a buyer, seller, and (if required) the company have all effectively agreed to proceed, the deal is papered with specific commercial terms: price per share, the number of shares, any escrow or holdback, and representations from the seller about clean title to the shares. Larger or more complex transactions sometimes use structures beyond a flat purchase — earn- outs tied to a future exit, or forward contracts that lock in a price now for shares that transfer later (used when a ROFR period or a lock-up hasn't yet expired).

Closing involves executing a stock (or unit) transfer agreement, updating the company's cap table and stock ledger, and — critically — the company's transfer agent or legal team recording the new owner. Funds typically move through escrow, released once the company has confirmed the transfer is valid and recorded. For cross-border deals, this step also brings in currency conversion and, depending on jurisdiction, tax withholding considerations for both sides.

For the seller, the transaction is largely done — though tax reporting on the gain (or loss) still needs handling in their home jurisdiction. For the buyer, this is where the real position begins: they now hold an illiquid stake with no board seat and no negotiated information rights, dependent on the company's next round, tender offer, or eventual IPO or acquisition for their own future exit. That asymmetry — the buyer taking on years more illiquidity risk than the original investor did — is the core economic reason secondaries trade at a discount in the first place.