Definition of a Secondary Sale
A secondary sale occurs when a stockholder sells one or more of their shares to a third-party. For it to be a true secondary sale, the sale can’t occur alongside an acquisition of the company. Instead, the shares need to be sold to another investor.
Some secondary sales take place against a backdrop of restrictions and legislation. For example, secondary sales may be restricted without board approval, or the company itself might need to be given the right of first refusal. When that’s the case, the stockholder may be required to offer to sell their shares to the company before they’re able to carry out a secondary sale to another investor.
Secondary sales differ from primary sales because in primary sales, the company sells stock to its investors and keeps the money. In secondary sales, the proceeds of the sale go towards the stockholder and the company doesn’t see a cent.
Because secondary sales take place in privately owned companies, secondary sales are often the only option that investors have available to them.
Secondary stockholders need to be aware of a range of implications that can come into play, including:
- Local law: Different countries have different laws regarding the sale and taxation of secondary stock.
- Contractual restrictions: Depending upon the contract that governs your shares, you may be subject to restrictions such as time limits that prevent you from selling before a certain date.
- Company performance: The way that the company has performed in recent months and years can have a huge impact on the amount that you can expect to receive in your secondary sale.
- Availability of buyers: You may find it difficult to find a buyer if the pool of potential buyers is small or non-existent.
- Board approval: In some circumstances, and depending upon the contract that’s in place, you may require approval from a company’s board of directors before you’re able to sell stock in a secondary sale.
What’s an example of a secondary sale?
For example, let’s say that a startup called “Acme Inc.” has completed its IPO and is now publicly traded. One of the company’s early investors, who owns a large number of shares in Acme, decides to sell some of their shares to a new investor.
This would be considered a secondary sale.
Secondary sales are common in the startup world, as they provide a way for existing shareholders to cash out some of their investment and for new investors to buy into the company. They can also provide additional capital for the company to use for growth and expansion.