Secondary Strategies for Startups
In today’s environment of extended exit windows, startups must both preserve growth capital and manage the liquidity needs of founders and key team members.
In today’s environment of extended exit windows, startups must both preserve growth capital and manage the liquidity needs of founders and key team members. Properly structured secondary transactions—limited sales of existing shares—allow founders to monetize a portion of their “on-paper” value, supporting focus, resilience, and retention, while providing a side mechanism that keeps the cap table clean and does not overshadow growth plans.
Effective secondary strategies should be considered after achieving PMF, typically during Series A–B rounds, and must involve fair pricing, reasonable quantity limits, transparent governance (Board approval, ROFR/co-sale, single window), and planned ESOP liquidity for employees. The ultimate goal is to channel short-term cash relief into the long-term value-creation machine.
Why “secondary”—and why now?
Founders and teams often carry most of their wealth “on paper” while having almost no cash flow. To extend runway, they cut costs, and many founders take little or no salary. As a result, even while leading companies worth $50m or $100m, founders often lack personal liquidity—undermining motivation.
During extended exit cycles, controlled secondary sales (i.e., limited share disposals by existing holders) provide focus, resilience, and risk management. Properly designed, they meet personal/family liquidity needs without undermining motivation, strengthen retention, and function as a side solution that does not crowd out growth strategy.
Illustrative Examples
SpaceX – Regular secondaries for employees; its Dec 2024 deal valued the company at ~$350B and enabled employees/insiders to sell shares. (Elon Musk has referred to a “biannual sale” practice.)
Stripe – In 2023, raised $6.5B not for operating needs but to provide liquidity and cover tax obligations of current and former employees.
Canva – In 2025, an employee share sale valued the company at ~$42B; among the firms offering regular pre-IPO secondary deals.
OpenAI – In 2024, closed a ~$80B employee tender; in 2025 was reported to be negotiating another ~$500B employee share sale, subject to market conditions.
Timing and Signaling
The optimal window is generally post-PMF, around Series A/B when institutional investors enter. If executed too early—before visibility into revenue, unit economics, or pipeline—founder sales send negative signals. The “Why now?” question must be answered with solid metrics (pipeline, cohort analyses, MRR/ARR, profitability). The message should be “I’m here for the long game,” not “I’m exiting.”
Negative example: WeWork (2019)—Adam Neumann’s hundreds of millions in pre-IPO cash-outs drew criticism, raising governance and trust concerns. It showed how large-scale, premature founder liquidity can backfire.
Structural Alternatives: Primary + Secondary, Tender Offer, SPV
The most common setup is a mixed round: majority primary capital, small secondary allocation. Broader solutions include tender offers (time-bound purchase windows for employees/founders) or investor/employee SPVs. Occasionally, buybacks occur, though they require caution due to cash consumption and tax effects. Whatever the model, the cap table must remain clean and investor rights balanced.
Example – Mixed round: Rippling (May 2025) raised $450M primary plus $200M secondary in a single round, offering both growth capital and liquidity to early holders.
Sizing and Limits: Protect “Skin in the Game”
Market practice: allocate 10–20% of round size, or 2–5% of fully diluted shares, for secondary; founders’ total sales typically capped at 10% of their holdings. Post-transaction, founder ownership should not fall below critical thresholds (e.g., 50%). Employee liquidity should be limited to vested shares/options, with cliff/vesting rules intact. Liquidity may also be linked to performance milestones.
These limits are not mere negotiation—they are safeguards for long-term alignment.
Why It Matters
Alignment: Significant founder stake + lock-up ensures continued focus.
Signal management: Limited scale, priced at last round valuation, minimizes “early exit” perception.
Pitfalls to avoid:
Excessive founder sales (>10%) or critical ownership drop.
Heavy discounts to last round valuation, creating negative signaling.
Relaxing vesting/lock-up or including unvested shares.
Continuous open secondaries instead of discrete windows.
Cap table complexity (multiple SPVs, inconsistent rights).
Pricing and Fairness
Secondary pricing should be aligned with the last round valuation or within a reasonable band. Heavy discounts set harmful precedents. Unequal treatment of investors in the same class erodes fairness. Granting new investors extra rights (board seats, liquidity preference) should remain exceptional and well-justified. MFN clauses and equal access to information are essential safeguards.
Mechanics: Reference last priced round (preferred). If outdated, commission an independent valuation, supported by metrics (ARR/MRR, NRR, margins, pipeline) to justify price.
Governance: Approvals, ROFR/Co-Sale, Information Equality
Transactions must comply with Board approvals, SHA/bylaws, and ROFR/co-sale rights. Simultaneous, equal information access (data room, Q&A, defined timeline) prevents leaks and side deals. A single defined window (opening/closing) ensures efficiency and fairness. Employees require a simple guide (limits, taxes, cash flow). At closing, payments, share transfers, and updated cap table must be fully synchronized.
Employee Liquidity (ESOP): As a Retention Tool
Planned windows (e.g., annually), limited to vested options/shares, increase fairness and loyalty. Clear communication—who can sell, how much, at what price, and tax implications—reduces friction. Refreshing the ESOP pool and granting top-up awards post-liquidity strengthens retention.
Legal–Tax and Turkish Context
For multi-jurisdictional setups (e.g., Turkey top-co / Delaware top-co), early planning is critical: share transfer approvals, foreign investment/payment flows, withholding/personal taxes, and payroll implications. In Turkey, GPs/portfolio companies must consider contractual restrictions (ROFR, transfer bans) and reporting/custody requirements. Documentation (SPA, option exercise, assignment) and payroll effects require legal–tax advisors: “Today’s shortcut should not become tomorrow’s lawsuit.”
End-to-End Framework
Frequency & window: 1 (max 2) times per year, 10–15 business days open.
Eligibility: Vested only; unvested strictly excluded; min. tenure requirement possible.
Limits: Reasonable caps to preserve alignment.
Pricing: Near last round valuation.
Allocation: Pro-rata in case of oversubscription.
Documentation & approvals: Board resolution; ROFR/co-sale; SPA; escrow; MFN terms.
Communication: FAQ sheet, timestamped announcements, single data room, weekly Q&A summary.
ESOP pool: Refresh post-liquidity; plan refresh grants for retention.
Conclusion
Secondary transactions can provide liquidity relief for founders and employees while strengthening the company’s long-term value journey—but only if executed with the right timing, scale, price discipline, and governance. When structured around PMF/Series A–B, aligned with last round valuation, capped in size, and conducted through a single well-managed process (Board approval, ROFR/co-sale, transparent info-sharing), secondaries reduce signal risk and align interests across founders, employees, and investors.
Planned ESOP liquidity and pre-arranged legal–tax frameworks enhance retention and operational efficiency.
At its core, a secondary strategy is not an early exit but a strategic anchor: supporting founder focus, team motivation, and company growth. Poorly designed, it damages governance and valuation; well-designed, it extends runway, builds trust, and accelerates milestones. Every startup should adopt a Founder/Employee Liquidity Policy, with metric-based triggers (ARR, NRR, payback), transaction limits, and clear communications—making secondary liquidity a disciplined, repeatable part of the company’s strategy.
