Understanding secondary shares

Secondary shares are shares in a company that already exist and are held by a current shareholder. In a secondary transaction, those existing shares change hands. The company itself does not issue anything new and does not receive the proceeds — the selling shareholder does.

This is the opposite of a primary transaction, such as a funding round, where a company creates and sells new shares in order to raise capital for its own use.

Why secondary shares exist

Companies that remain privately held for long periods accumulate shareholders who may want liquidity before the company lists publicly or is acquired. Founders, early employees holding vested equity, angel investors and early venture funds can all reach a point where selling part of a holding is preferable to waiting.

Because there is no exchange for private shares, any sale has to be arranged privately between a willing seller and an eligible buyer, within the rules that govern the company's share register.

What makes them different from listed shares

• There is no continuous market price; a price is negotiated for each transaction.
• Availability is intermittent and depends entirely on whether a shareholder is seeking liquidity.
• Transfers usually require company consent and may be subject to rights of first refusal.
• Financial information is limited compared with the periodic reporting required of listed companies.
• Holding periods can be long and are not within the investor's control.

Practical considerations

Because each secondary transaction is individually negotiated, the terms matter as much as the company. Investors should understand exactly what they are acquiring, how the interest is held, what information rights come with it, and what restrictions apply to any future sale.

Private-company investing involves substantial risk, including the possible loss of the full amount invested. Independent financial, legal and tax advice should be obtained where appropriate.