Selling startup equity on secondary markets

You can sometimes sell private startup shares before the company exits, but only on terms the company controls. The two normal paths are a company-run tender offer (the company or an investor buys back vested shares at a set price) and a direct secondary sale (you find a buyer yourself, then ask the company for permission). Both usually need board or company sign-off, both tend to price at a discount to the last round, and both can trigger a tax bill in the year you sell. This post is about the mechanics: who approves it, what discount to expect, and what you keep after tax.

If you are still deciding whether the equity is worth holding at all, start with is startup equity worth it in a down market and how startup equity makes money or not. This post assumes you already have vested shares (or exercised options) and want to turn some of them into cash early. Illustrative, not advice. Talk to a tax advisor before you sign anything.

What is a secondary, and how is it different from the company raising money?

A primary sale is the company issuing new shares to raise capital. That cash goes to the company. A secondary sale is an existing shareholder (you, an early investor, a founder) selling shares they already own to a buyer. That cash goes to the seller. Secondaries are how employees get liquidity before the company goes public or gets acquired.

The catch is that private shares are not freely tradable like public stock. Your option grant and the company bylaws almost always include a right of first refusal (the company can match any outside offer and buy the shares itself) and a transfer restriction (you cannot sell to anyone without company consent). So even when a willing buyer exists, the company sits in the middle of every trade.

What are the ways to actually sell?

There are three common structures, in rough order of how clean they are for an employee:

1. 01Company-run tender offer. The company organizes a window where employees can sell a capped amount of vested shares at one fixed price, usually alongside a primary round. An investor or the company buys them. This is the cleanest path: the price, paperwork, and approval are all handled for you. Late-stage companies (think Series C and beyond) run these every 12 to 24 months.
2. 02Direct secondary to a single buyer. You find a buyer (a fund that specializes in pre-exit shares, or an individual) and negotiate a price, then take it to the company for right-of-first-refusal and consent. More work, more negotiation, and the company can block or match it.
3. 03Forward contract or SPV. When the company forbids a true transfer of shares, some buyers offer a contract that pays you now in exchange for the proceeds when the shares eventually pay out. You keep legal title; the buyer takes the economic upside. These carry extra risk and fees, and the company may still treat them as a prohibited transfer. Read the fine print twice.

When can you sell, and when can you not?

You can only sell shares you actually own. That means vested options that you have exercised (paid the strike price and now hold real stock), or RSUs that have settled, or founder/early shares. Unvested options are not yours to sell. If you have vested but unexercised options, you have to exercise first, which itself costs money and can trigger tax. See how stock options and vesting work and what happens to options when you leave for that mechanics.

Beyond ownership, three gates decide whether a sale can happen at all:

• Company stage. Seed and Series A companies rarely have buyers or a tender process. Secondaries get realistic around Series B to C, when there is enough value and a recognizable name to attract funds.
• Transfer restrictions. Your stock agreement may flatly ban transfers, or allow them only with board consent. Read your grant documents and the company bylaws. If you cannot find them, ask your stock administration contact.
• Lockups and information rights. Companies often restrict sales to approved windows and require the buyer to sign confidentiality terms. Some forbid sales to competitors or to anyone the company has not vetted.

What discount should you expect on the price?

Private shares almost never sell at the headline price from the last funding round. Three things push the price down. First, the last round bought preferred stock, which sits ahead of your common stock in a payout. Common is worth less, often 20 to 40 percent less. Second, the buyer is taking illiquidity risk and cannot easily resell, so they want a discount for that. Third, in a soft market, buyers simply have leverage.

A useful mental model: in a healthy market, a clean secondary might price at 10 to 30 percent below the last preferred round. In a weak market, or for a company that has not raised in a while, discounts of 40 to 60 percent are common. A fresh, strong round resets the reference price upward, which is one more reason funding recency matters even after you are hired.

Who has to approve the sale?

Almost always the company, through some combination of the board, a stock plan administrator, and legal. The right of first refusal means that even after you and a buyer agree on a price, the company has a window (often 30 days) to step in and buy the shares itself on the same terms. If it does, your buyer walks away and the company gets your stock. If it waives that right, the sale proceeds to a consent step where legal confirms the transfer is allowed.

In a company-run tender offer none of this is your problem: the company has already decided who can sell, how much, and at what price. You just opt in. That is the trade-off. A tender offer is convenient but you take the price offered, whereas a direct secondary lets you negotiate but puts the approval burden on you.

What is the tax hit when you sell?

Selling triggers tax in the year of the sale. The exact treatment depends on what you sold and how long you held it, and it varies by your situation, so the numbers below are illustrative, not advice. Two layers can apply.

Layer one: exercising. If you exercise options to get sellable shares, the spread between the strike price and the current value can be taxed at exercise. For ISOs that spread can feed the alternative minimum tax; for NSOs it is ordinary income at exercise. Layer two: the sale itself. The gain from your cost basis to the sale price is a capital gain. Held more than one year (and, for ISOs, two years from grant), it can qualify for long-term rates; held less, it is short-term and taxed as ordinary income.

A worked example (illustrative, not advice). You exercised 10,000 NSOs at a $1.00 strike when the 409A value was $1.00, so no spread and no tax at exercise. Three years later a tender offer prices your common at $9.00. You sell all 10,000 for $90,000. Your basis is $10,000, so your gain is $80,000. If it qualifies as long-term, a combined federal-plus-state rate might be roughly 30 percent in a high-tax state, leaving about $56,000 after tax (illustrative, not advice). If instead you had to exercise at sale time with a large spread, a chunk of that would be ordinary income at exercise and the math changes a lot.

How much should you actually sell?

Selling some equity early is not a failure of conviction. It is risk management. A common approach is to sell enough to de-risk (cover the taxes you already owe from exercising, recoup your original exercise cost, or take a meaningful but partial amount off the table) while keeping the majority for the upside. Selling everything at a 50 percent discount in a panic is usually the worst outcome; so is holding 100 percent into a down round that wipes out common.

Tie the decision to the company's trajectory, not your cash-flow stress. If the company just raised a strong round, the reference price is high and a partial sale at a modest discount can be a good deal. If it has not raised in two years and the discount is 50 percent, the market may be telling you something. For how to read that signal, see should you join a startup that just raised and how equity dilution works round by round.

A tender offer is convenient but you take the price offered. A direct secondary lets you negotiate but puts the approval burden on you.