Usually, when a startup raises money, it sells new shares to investors (this is called the primary market).
In a secondary market, people who already own shares in the company – like employees who got stock options or early investors – can sell their shares to someone else.
In this case, the startup doesn’t issue any new shares, and the company doesn’t get the money directly. Instead, the money goes to the person selling their shares.
Why Are Secondary Markets Important?
For employees or early investors, it can take years before a company goes public (through an IPO) or is bought by another company.
Their shares might be worth a lot, but they can’t access that money until there’s a big event like an IPO.
Secondary markets let them sell some of their shares earlier and turn that value into cash.
Also, some investors use secondary markets to buy shares in promising startups before they go public.
They’re hoping that when the company finally does go public, the value of their shares will have increased significantly.
Since the company isn’t issuing new shares, selling shares through a secondary market doesn’t change how much of the company the original owners or employees still control.
It’s just a trade between two people who already own or want to own shares.
How Does It Work?
There are platforms like EquityZen or Forge where these transactions happen.
These platforms help connect people who want to sell their shares with investors who want to buy them.
The price of the shares in the secondary market is usually based on the company’s most recent valuation, but it can vary depending on demand and how well the company is doing.
Why Should You Care About Secondary Markets?
If you work for a startup and own stock, secondary markets give you the chance to sell some shares before the company has a big exit (like an IPO).
It’s a way to get some cash without waiting for years.
As a founder, you might allow secondary sales to help your employees cash out some of their stock and stay motivated.
However, startups often need to approve these sales to make sure the right people are buying shares.
Overall, secondary markets are a way for people who already own shares in a startup to sell them and make some money before the company goes public.
It’s a win-win for people looking for liquidity without affecting the company’s ownership too much.
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