Sell vested shares to a third-party buyer before an IPO or acquisition.
In a secondary sale, an existing shareholder sells shares to a new buyer outside of a primary capital raise. The buyer pays cash at close; you transfer shares. Most private companies have a Right of First Refusal (ROFR): the company, and frequently its preferred investors, has the absolute contractual right to match any third-party offer before the sale can close. The mandatory ROFR window (typically 30–90 days) introduces severe execution risk. Market conditions change rapidly, and the prospect of waiting three months only to have the deal intercepted by the company causes many buyers to abandon negotiations entirely.
Secondary buyers demand a liquidity discount, frequently pricing shares 10–30% below the valuation established at the company's most recent primary funding round. This discount reflects information asymmetry: buyers lack access to audited financials or internal metrics, and the illiquidity premium they require for holding a non-tradeable asset. After the discount, add brokerage commissions of roughly 5% on most secondary platforms, and apply the appropriate capital gains tax based on your holding period. These deductions can meaningfully reduce the net cash you actually receive.
Direct secondary sales establish a new market price for common stock, which can artificially inflate the company's subsequent 409A valuation, raising strike prices for future employees and penalizing the company's ability to use equity compensation competitively. Companies also want to control who holds their cap table. Beyond ROFR, many companies deploy blanket transfer restrictions requiring explicit Board approval for any share transfer, effectively granting unilateral veto power over employee liquidity. Settlement times are notoriously extended, frequently weeks to months.
Typically you must exercise your options first to receive shares, then sell. Some structured transactions allow a same-day exercise-and-sell where the buyer funds the strike price, but the resulting spread is immediately taxed as ordinary income, eliminating much of the tax advantage of ISO treatment.
A Right of First Refusal gives the company (and sometimes other stockholders) the right to purchase your shares at the same price any third-party buyer has offered. If exercised, the external sale doesn't proceed. The company buys your shares instead. This is contractually binding and the company typically has 30–90 days to decide.
Investors in primary rounds buy preferred stock with liquidation preferences. Secondary buyers are buying common stock, which has lower economic priority and no special rights. Add information asymmetry and illiquidity, and buyers demand a meaningful discount, typically 10–30% off the last preferred round price.
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