Yes. Founders and early employees can sell some of their shares before an IPO or acquisition, usually to an investor alongside a priced round or back to the company in a buyback. These “secondary” sales need board approval, waivers of the transfer restrictions in your stock and investor agreements, and a price the company can defend, because a price above the common stock’s fair market value can be taxed as compensation. Investors usually support a modest founder sale and expect the founder to keep most of their shares.
Key takeaways
- A secondary sale is a sale of shares someone already owns, so the money goes to the seller, not the company.
- The two common structures are an investor buying founder shares alongside a priced round and the company buying shares back with cash it has raised.
- If the buyer pays more than the 409A value of the common stock, the premium risks being taxed as wages, especially when the company is the buyer.
- A company buyback is limited by Delaware law and can affect other stockholders’ QSBS eligibility.
- The secondary price will likely be considered in your next 409A valuation, which can raise the strike price for future option grants.
- A broad offer to many holders can be a tender offer under SEC rules, with a minimum offering period.
What is a secondary sale?
In a primary sale, the company issues new shares and keeps the money. In a secondary sale, an existing stockholder sells shares they already own and keeps the money. Founders usually raise the question after a Series A or B, when they have spent years on a small salary and the company is worth enough that selling a small stake changes their personal finances without changing their commitment. Investors often support a modest founder secondary for the same reason: a founder who isn’t worried about rent can make longer-term decisions.
The company doesn’t receive the money, so a secondary doesn’t extend its runway. It still touches the company’s cap table, its valuation, its tax reporting and its investor agreements, so it needs the company’s cooperation and approval even when an outside investor is the buyer.
How is a founder secondary structured?
Most founder secondaries take one of two forms.
| Investor purchase | Company buyback | |
| Who pays | A new or existing investor | The company, from its cash |
| When | Usually at the closing of a priced round | At or after a round |
| Typical price | At or below the preferred price, since common has no preference | Hard to justify above the 409A value |
| Company cash | Unchanged | Reduced |
| Delaware repurchase limits | Don’t apply | Apply |
| QSBS | Buyer’s purchased shares aren’t QSBS; others unaffected | Can affect QSBS for shares the company issues around then |
| Compensation risk | Lower when the buyer is an arm’s-length investor | Higher |
Investor purchase. The lead investor in a round, or another investor, buys common stock directly from the founders, usually at the same closing as the round. Because common stock has no liquidation preference or investor rights, the buyer usually pays less than the preferred price. This is the cleaner structure for most founders, because the company spends no cash and the price is set by someone negotiating for their own account.
Company buyback. The company repurchases shares with cash, usually money it just raised. Investors are often reluctant to see their new money go straight to a founder, and the tax, Delaware law and QSBS issues described below are sharper when the company is the buyer.
Can I sell my shares on a secondary marketplace?
Probably not yet. Online marketplaces for private-company stock match sellers with outside buyers, but they generally work only for later-stage companies with well-known names and real buyer demand. At seed or Series A there’s usually no market for your shares, and the buyers who do show up tend to want a steep discount.
A marketplace also doesn’t get around your company’s rules. The right of first refusal, the transfer restrictions in your stock purchase agreement and any required board approval still apply, and many companies limit these sales or ban them outright. A sale to an unknown buyer can also add an unexpected stockholder to your cap table, which your investors won’t welcome. See Right of First Refusal.
Finally, a marketplace sale sets a price for your common stock like any other secondary, and that price may be considered in your next 409A valuation (see below).
What approvals and waivers do I need?
Start with the board. A founder who sells is usually also a director, so this is a conflicted transaction. Disclose the terms fully and have the disinterested directors approve it. See Fiduciary Duties of Startup Founders.
Next, clear the transfer restrictions. Your stock purchase agreement or equity plan may give the company a right of first refusal, and after a priced round a ROFR and Co-Sale Agreement typically gives investors a second right to buy and a right to sell alongside you. Each needs a written waiver, or the holders exercise their rights instead. See Right of First Refusal.
Then check the charter. Protective provisions often require the preferred stockholders to approve a company repurchase of common stock, apart from routine buybacks of unvested shares from people who leave. See What Are Protective Provisions?. Venture debt agreements commonly restrict buybacks too.
Finally, sell vested shares. Unvested shares remain subject to the company’s repurchase right, and buyers won’t want them. The sale itself also needs an exemption from securities registration, which in practice means the buyer is an accredited investor and the purchase agreement includes the usual investment representations.
When is a secondary price taxed as compensation?
Gain on selling stock is normally taxed under the rules for capital gains. But when someone buys shares from an employee or founder for more than their fair market value, and the payment is connected to the seller’s work for the company, the IRS can treat the excess as compensation. Compensation is taxed as ordinary wage income, and the company becomes responsible for withholding and payroll taxes it may not have collected.
The risk depends mostly on who is buying and why. It is highest when the company is the buyer, because a premium the company pays its own people looks like pay, and because the company values its common stock at the 409A price whenever it grants options. It is lower when an unrelated investor sets the price for its own investment reasons and buys from a mix of holders, not only current employees. The company’s accountants may also have to record part of a premium as compensation expense. This area is fact-specific, so the company and each seller should talk to a tax advisor before the price is agreed.
Example. A company closes a Series A at $3.00 per share of preferred stock. Its latest 409A values the common stock at $0.90. The lead investor offers to buy 300,000 vested common shares from the CEO at $2.40, or $720,000. If the investor is buying for its own account at a price it negotiated at arm’s length, the sale is more likely to be treated as a sale of stock, though a purchase from the CEO alone still carries some risk. If the company bought the same shares at $2.40, the $1.50 per share above the 409A value, or $450,000, would be at real risk of being treated as wages. Either way, the valuation firm will likely consider the $2.40 sale in the next 409A.
How does a secondary affect our 409A valuation?
A 409A valuation looks at all the evidence of what the common stock is worth, and an actual sale of common stock is strong evidence. How much weight it gets depends on the size of the sale, who bought, whether it was arm’s length and whether the company has done secondaries before. A meaningful sale at a price well above your current 409A can raise the next valuation, which raises the exercise price for new hires’ options. Tell your valuation firm about a planned secondary before it closes, and plan option grants with that in mind. See 409A Valuation and How to Value Startup Stock.
How does a secondary affect QSBS?
Qualified small business stock under Section 1202 must be acquired directly from the company at original issuance. An investor who buys founder shares in a secondary doesn’t get QSBS treatment on those shares. The founder’s own position depends on their holding period and the other Section 1202 requirements, which is a question for a tax advisor.
Company buybacks raise a separate problem. Section 1202 disqualifies stock the company issues around the time of certain repurchases. Buying stock back from a holder or a related person within two years before or after issuing stock to that holder can disqualify that holder’s stock. Buying back more than 5% of the company’s stock by value within one year before or after an issuance can disqualify everyone’s stock from that issuance. Small repurchases ($10,000 or less, or 2% or less) are ignored, and some repurchases from departing employees are excepted. Because a buyback near a financing can cost the new investors their QSBS treatment, investors often push for an investor purchase instead.
Can a Delaware company always buy back its own shares?
No. Section 160 of the Delaware General Corporation Law bars a corporation from buying its own shares when its capital is impaired or when the purchase would impair it. In practice, the board must be satisfied, based on a reasonable assessment of the company’s assets and liabilities, that the company has enough surplus to fund the buyback. Directors who approve an unlawful repurchase can be personally liable. A startup that is burning cash should also make sure the buyback leaves it able to pay its debts as they come due.
What if we offer to buy from many stockholders at once?
That is a later-stage tool, but know the rule. A broad offer to many holders at a fixed price can be a tender offer under SEC rules even for a private company. A tender offer by an outside buyer must stay open at least 20 business days. Under SEC relief issued in April 2026, a private company’s own all-cash, fixed-price offer can run for 10 business days if it meets the conditions. Either way, the offer needs a disclosure document and careful planning with counsel.
What should we do before a founder sells?
- Agree with the lead investor on the number of shares and the price.
- Have the disinterested directors approve the sale.
- Get written waivers of the company ROFR, the investor ROFR and co-sale rights, and any required preferred approval.
- Tell the valuation firm and plan upcoming option grants.
- Have the company’s and the seller’s tax advisors review compensation risk, withholding and QSBS.
- Paper the sale with a stock purchase agreement and update the cap table the day it closes.
- Decide how you’ll explain the sale to employees, and whether they should get a chance to sell later.
For related topics, see Preferred Stock vs Common Stock, Startup Founder Salary, What Is a Cap Table? and What Does My Startup’s Board of Directors Need to Approve?.
If you’re planning a founder secondary alongside a round, contact us.
