A secondary transaction refers to the sale of pre-existing shares to a new investor. In contrast, in a primary transaction, the company issues new shares and receives the proceeds.
If founders know how to engage in secondary transactions, the path to liquidity does not have to involve the business reaching a company-wide exit event.
The scale of the exits through secondary funds helps explain why founders should explore secondary liquidity paths. According to PitchBook, in 2025, US venture capital exit value by type came to $106.3 billion for secondary funds, $119.6 billion for public listings, and $140.7 billion for acquisitions.
Importantly, the $106.3 billion figure reflects only the exits made through secondary funds that purchase pre-owned startup shares. It excludes a much wider range of secondary activity and direct transfers between buyers and sellers.
This article looks at how founders can think about secondary liquidity in practice. We cover the structure of the secondary VC market, the use of VC secondaries and founder preferred shares, the emergence of exchange fund structures, and the basics of direct share sales.
Key takeaways
- Secondary transactions give founders access to liquidity without waiting for an acquisition or IPO.
- The secondary VC market includes secondary funds, structured capital providers, platforms, and various other participants.
- VC secondaries and founder preferred shares let founders monetize part of their stake while staying invested in the company’s future.
- Each path has distinct requirements around company stage, investor approval and tax treatment.
Comparing Secondary Liquidity Options
| Structure | Liquidity Type | Tax Timing | Complexity | Typical Eligibility |
|---|---|---|---|---|
| VC Secondaries | Partial | Immediate | Low–Medium | Later-stage companies |
| Founder Preferred | Partial | Potentially deferred | High | Active financing round required |
| Exchange Fund | Partial + Diversification | Potentially deferred | High | around $100M+ valuation |
| Direct Sale | Full upfront | Immediate | Low | No transfer restrictions |
Overview of the secondary VC market
The secondary VC market has evolved into a layered ecosystem made up of several distinct types of participants, each addressing liquidity from a different angle.
One group consists of secondary investment funds. These funds purchase stakes directly from founders, employees, or early investors in later-stage private companies, and they also purchase fund interests from limited partners who want to exit before a fund’s natural life cycle ends.
Many structure their deals with flexibility in mind, sometimes including deferred payments or arrangements that let a seller retain some participation in future gains.
A second group includes structured capital providers, which extend capital against the value of a shareholder’s position rather than buying shares outright. This is often used to fund option exercises or to give founders and investors liquidity without forcing a sale at a steep discount.
A third group is made up of marketplaces and platforms that connect buyers and sellers directly, frequently offering pricing data and a more standardized process.
Alongside these sit company-sponsored liquidity programs, where the company controls the terms of a tender offer, auction, or trading window, and advisory or brokerage firms that execute direct transfers and other transaction structures on behalf of clients.
Together, these participants give founders multiple routes toward liquidity, each suited to a different stage, valuation, and risk appetite.
VC Secondaries
VC secondaries refer to direct investments made by secondary funds into shares already held by a company’s existing stakeholders, rather than into newly issued stock. For founders, this offers a relatively direct path to liquidity.
A secondary fund identifies a later-stage company with meaningful revenue and a track record of growth, then negotiates to purchase a portion of the existing shares.
However, investors, incoming or existing, prefer founders to have some skin in the game. Hence, according to sources like Crunchbase, unless you are ceding control of the company, selling more than 5-10% of your stake will raise eyebrows.
This makes VC secondaries useful for founders who want partial liquidity.
Founder preferred shares
Founder preferred shares are a class of preferred stock issued to founders ,that allows founders to sell equity alongside institutional investors during a financing round or other liquidity event.
Founders typically hold common stock, which sits behind preferred shareholders in the payout order during a liquidation or acquisition. Even when a founder’s equity stake represents significant value, their actual payout can lag behind that of investors holding preferred shares.
By converting a portion of their holdings into preferred stock and bundling it with the preferred shares being sold in a financing round, founders can participate in that sale on terms similar to existing investors.
This can let founders realize value earlier than they otherwise would and, depending on the structure, may offer tax advantages over a straightforward sale of common stock.
The approach is not without tradeoffs. It adds complexity to the cap table, increases legal work during an already demanding financing process, and can draw closer scrutiny from investors.
Exchange fund structures
Exchange fund structures offer founders a way to gain liquidity without selling shares outright to a single buyer at a discount. Instead of negotiating a sale of shares, the founder contributes a portion of their equity into a pooled vehicle alongside shares contributed by other participants.
The value of this contribution is typically referenced to the company’s most recent institutional funding round. In a typical arrangement, a founder might contribute a defined share of their stake, receive part of that value as near-term liquidity, and convert the remainder into an ownership interest in the broader pooled portfolio.
Because there is no fixed-price transfer of shares at the time of the exchange, this structure can avoid triggering an immediate taxable sale, depending on how it is set up.
Beyond liquidity, this approach gives founders exposure to a diversified portfolio of companies rather than concentrated exposure to a single business outcome.
The tradeoff is that exchange fund structures involve more complex legal arrangements and are generally limited to founders of later-stage companies with valuations above roughly $100 million and a recent institutional round on record.
Founders considering this route also need to place some trust in how the fund is governed and how its portfolio and valuations are managed.
Direct sales
A direct sale, sometimes called a direct transfer, is the most straightforward way for a founder to achieve secondary liquidity. In this structure, a buyer pays the full purchase price upfront, in cash, directly to the founder.
The process typically follows these steps:
- Notice: The founder formally notifies the company of their intent to transfer shares.
- Approval: The company confirms approval of the proposed transfer.
- Agreement: The parties execute a share transfer agreement.
- Settlement: Cash is exchanged for shares, and the company’s share register is updated to reflect the new ownership.
Direct sales carry the least counterparty risk among secondary structures, since the transaction is settled in full at the time of transfer. They are only available, though, when the founder’s shares are free of transfer restrictions that would otherwise block a sale.
Frequently asked questions
Here we added the most frequently asked questions for secondary liquidity,
How do startup founders exit when raising money?
In a funding round, founders who hold founder preferred stock can convert these common shares into preferred stock to be sold alongside other investor-owned preferred stock to the incoming investor.
What are the standard co-founder exiting terms?
Co-founder exits are typically governed by vesting schedules and good/bad leaver terms set out in founder agreements, which determine how much equity a departing co-founder retains and the price at which the departing founder’s shares are repurchased.
What are the liquidity options available for founders?
Founders can sell to secondary funds, pursue exits via founder preferred shares, participate in exchange fund structures, or arrange a direct sale, depending on the company’s stage and their personal liquidity needs.
Eqvista- Helping Founders Navigate the Path to Liquidity!
Secondary liquidity has matured into a genuine alternative to waiting for an acquisition or an IPO, giving founders more control over when and how they realize value from years of building their company.
Each structure, however, carries its own tradeoffs, and the right choice depends heavily on a company’s stage, its relations with the existing investors, and the founder’s personal circumstances.
Eqvista’s valuation experts can help founders understand the value of their equity before pursuing any liquidity path. Contact us to discuss how we can support your liquidity needs!
