Transaction mechanics for existing startup shares
In a secondary sale, a buyer purchases existing shares directly from a current shareholder, so the money goes to that shareholder rather than into the company's bank account. This differs from a primary round, where the company issues new shares and receives the cash directly, the same distinction that matters when selling shares outside a formal secondary process.
Secondary sales are usually arranged alongside a new primary funding round, where the incoming investor buys some new shares from the company and some existing shares from founders or early employees, giving those sellers partial liquidity while the company still raises fresh capital, one of the clearest examples of employee equity at exit before a full sale.
Liquidity motivations for founders and employees
- Founders and early employees want some personal liquidity without waiting years for a full exit
- Early investors want to realize part of their gain and free up capital for new investments
- New investors want a larger stake than the primary round alone would offer
- The company wants to retain key people by giving them a partial cash-out without needing them to leave
Transfer rights and pre-emption in private sales
Shares in private companies are rarely freely transferable. Articles of association and shareholders' agreements typically include pre-emption rights, giving existing shareholders the right to buy shares before an outside party can, and board or investor consent requirements for any transfer of employee shares.
A founder wanting to sell shares privately should check the articles and shareholders' agreement first, since an unauthorized transfer can be void or trigger penalties.
Capital gains liability for secondary share sales
Proceeds from a secondary sale are generally treated as a capital gain in most European countries, taxed on the difference between the sale price and the amount originally paid for the shares (or their value at grant, for shares acquired through options). Rates and available reliefs vary significantly by country and change frequently, so sellers should confirm current treatment with a local tax adviser before completing a sale.
Questions sellers ask about secondaries
- Does a secondary sale bring cash into the company?
- No. Proceeds go directly to the selling shareholder, not the company, since existing shares are simply changing hands.
- Can any employee sell shares in a secondary sale?
- Only if the company authorizes it and the shareholders' agreement permits the transfer; many companies limit secondary sales to organized windows tied to funding rounds.
- Are secondary sale proceeds taxed the same as salary?
- Generally no. They are usually treated as a capital gain rather than employment income, though the specific tax treatment depends on the country and how the shares were originally acquired.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.