Building a startup is thrilling, but behind the pitch decks and product launches lies a much tougher reality. For most founders, the road is long, uncertain, and personally costly. It’s not unusual to spend years pouring everything—time, money, relationships—into a company that may never deliver a major exit or IPO. And when those liquidity events do happen, they’re arriving later than ever.
IPOs are rare. Acquisitions can take a decade or more. In the meantime, life doesn’t wait. Mortgages, family responsibilities, and everyday expenses keep coming, while many founders accept salaries far below market rate and defer benefits indefinitely.
Against this backdrop, founder secondary sales have emerged as a practical way for entrepreneurs to unlock some of the value they’ve built—before a sale or public offering. These deals, often timed around a new funding round, allow a founder to sell a portion of their personal shares to new or existing investors. Done right, it’s not about “cashing out.” It’s about reducing personal risk while staying fully committed to the company’s growth.
Timing, Transparency, and Legal Hurdles
While the concept is simple, executing a secondary sale is anything but. Founders usually can’t just sell their shares whenever they want. Company bylaws, stock agreements, and investor protections like rights of first refusal or co-sale clauses often apply. Board and investor approvals are standard. These rules exist for good reason—to keep the company’s structure clean and ensure everyone’s incentives remain aligned.
Buyers, whether new or existing investors, will also demand diligence. That can put founders in a tricky spot: How much information is appropriate to share? Disclosing sensitive business data without proper protections can open the door to regulatory risk or competitive exposure.
Tax implications add another layer. Selling qualified small business stock or exercising options ahead of a liquidity event can trigger complex IRS considerations. Founders need to think carefully about Rule 701 limits, 409A valuation issues, and how the sale may affect the company’s investor thresholds. Getting legal and tax advice before entering into a secondary deal isn’t just smart—it’s essential.
Just as critical is how a secondary transaction is perceived. Selling too much, too soon, or without context can raise red flags with employees and investors. Communication matters. Founders should be clear that a modest secondary sale isn’t a sign of retreat, but a way to gain financial breathing room and increase sustainability.
Generally, a sale of 5–10% of founder holdings, tied to strong business milestones—like a successful product launch or major funding round—is viewed as reasonable. Anything more may require a careful narrative to avoid misinterpretation.
A Long-Term Alignment Tool, Not a Quick Exit
When thoughtfully structured, founder secondary sales can actually strengthen alignment. Relieving financial pressure can help founders stay focused, reduce burnout, and make better decisions. For investors, a financially stable founder is more likely to keep pushing for the big outcome.
It’s important to frame secondary sales not as shortcuts, but as strategic tools. Used carefully, they let founders manage risk while staying all-in. And in today’s fundraising climate, more investors are warming to this idea—so long as the founder still has meaningful “skin in the game.”
These transactions, when compliant and transparent, aren’t just about liquidity. They’re about sustainability. Building a great company takes time—sometimes a lot of it—and having a bit of stability along the way can be the difference between burning out or breaking through.
