Secondaries are transactions in which an existing stockholder sells their stock for cash to third parties or back to the company itself before the company undergoes an exit; traditionally, an exit refers to an M&A or an IPO.
Generally, secondaries for Series A through mid-stage startups occur during financing rounds. The three most common secondary structures are:
- A purchase of the founder’s shares by the company itself (a buyback or repurchase), using cash from the venture financing with the agreement of the lead investor
- A direct purchase of the founder’s shares from an existing or outside investor
- A direct purchase of the founder’s shares by an existing or outside investor, followed by a conversion of those shares to preferred stock
For more on secondaries see Founder’s Guide to the Pre-IPO Secondary Market.