Secondaries: Why Founders Sell Shares in Their Companies

About this episode

Holger Seim from Blinkist recently put it perfectly in the podcast: "I wish I had done secondaries earlier." This statement shows how important the topic of secondary transactions has become for successful founders – and how often it's underestimated.

What are Secondaries?

Secondary transactions, or secondaries for short, refer to the sale of existing company shares to new or existing investors. Unlike primary transactions, where new shares are issued and capital flows directly into the company, secondaries only change ownership structures. The money goes directly to the selling shareholders – usually founders or early employees.

How do Secondary Transactions work?

The process typically runs parallel to a regular funding round. While the company sells new shares to investors (primary), existing shareholders can simultaneously sell a portion of their shares (secondary). The valuation is usually based on the current funding round.

Important prerequisites for secondaries:

• –Tag-along and drag-along rights: These must be regulated in shareholder agreements
• –Consent from existing investors: VCs often have a say in secondary sales
• –Transparent communication: All parties should be informed about the transaction

In which phase are Secondaries justified?

Early Phases (Seed/Series A)

In very early phases, secondaries are rather uncommon and can send negative signals to investors. Founders should still be fully committed at this point and have their entire risk in the company.

Growth Phases (Series B/C and later)

From Series B onwards, secondaries become increasingly accepted and even desired. Founders have already proven that their business model works, and some diversification is justified.

Mature Phases (Late Stage)

In later rounds, secondaries are almost standard. Founders and early employees have often invested years or even decades in the company and should have the opportunity to realize part of their gains.

Why Secondaries are Important for Founders

Financial Security

After years of hard work with usually minimal salary, secondaries enable founders to finally achieve financial security. This reduces personal stress and can paradoxically lead to better entrepreneurial decisions.

Risk Diversification

Even successful startups can fail. By selling a portion of their shares, founders spread their risk and are no longer 100% dependent on the success of a single company.

Motivation and Focus

Contrary to intuitive assumptions, secondaries can actually increase motivation. Founders who have already monetized part of their shares can focus more relaxedly on long-term growth without constantly being under pressure to risk their entire financial future.

Team Motivation

When early employees also get the opportunity for secondaries, their motivation and commitment to the company increases significantly. It shows that their participation has real value.

Timing is Crucial

The art lies in the right timing. Too early secondaries can undermine investor confidence, too late means missed opportunities for risk diversification. Holger Seim's statement "I wish I had done secondaries earlier" reflects exactly this dilemma.

Successful founders usually start from Series B onwards, selling a small percentage of their shares in each subsequent round. This way, they gradually build financial security without losing investor confidence.

Conclusion

Secondary transactions are an important tool for successful startups and their founders. They enable risk diversification, financial security, and can paradoxically lead to better entrepreneurial decisions. The right timing is crucial – not too early, but also not too late.