There are a few types of secondary stock sales that you need to know about. More secondary stock sales will start as a one-off event, but if there is a demand for the stock other sales can occur. Companies can also use a secondary sale as a means of raising additional funding.
A One-Off Sale
The most common type of secondary stock sale will be the one-off sales. This happens when the seller creates a one-time transaction with a current cap table investor or a completely new investor. This can include an employee selling part of their stock after they have left the company for any reason. In these situations, many companies will push for the sale to the known investor.
It is important to note that a one-off sale can backfire on a company depending on the number of stocks being sold. If a new and potentially bad behaved investor purchases the stocks, the stability of the company can be compromised. This is why companies push for sales to investors they already know.
Part Of A Funding Round
Most people do not consider funding rounds to be the best time for a secondary stock sale. However, funding rounds can be oversubscribed when you have a late-stage breakout company. With the extra demand for stock, investors who are not able to get a full primary allocation will be open to a secondary stock sale. There are also many investors who prefer a blend of different stock options.
It is important to note that with this type of sale, investors will generally discount the stock. This is due to the lack of preference and the lack of protection in a downward situation. The discount placed on the stock will range from 20% to 30%.
If you are thinking of offering common stock for secondary sale during a funding round, you need to talk to an attorney first. You will want to avoid any 409A implications or repricing of the common stock during the sale. Generally, you should stick to no more than 20% of the funding round happening on the secondary market.
Preferred Buyer Programs
Another type of sale will be a preferred buyer program. It is possible for this program to be informal or formal. An informal program will include the company suggesting potential sellers to a small group of funds while the formal program will be a ROFR assignment to the funds.
If you are thinking about a formal program, the fund will need to sign a term sheet or agreement. Part of the agreement will include the find purchasing stock in a pre-defined range. A ROFR assignment may be applied only after these forms and agreements have been signed.
There are a few types of secondary stock sales that you need to be aware of. The one-off sales are the most common and could happen at different times based on the needs of the seller. Secondary sales can occur during a funding round or as part of a preferred buyer program.
