Secondary sales and founder liquidity

In a primary round the company issues new shares and receives the money. Ownership percentages dilute, and the cash funds the business. In a secondary transaction an existing shareholder sells shares they already own to a buyer, and the proceeds go to the seller — the company receives nothing and its cash position is unchanged.

Total share count does not change in a secondary, so there is no dilution. What changes is who sits on the cap table, which is why companies control secondaries tightly through transfer restrictions and rights of first refusal.

Secondaries are usually permitted alongside a strong primary round, from Series B onward, when the company is clearly performing. Investors have a practical reason to allow them: a founder with no financial cushion is a founder who may take an early acquisition offer for personal reasons, and a modest secondary removes that pressure.

The amount matters. Common practice allows a founder to sell somewhere between five and fifteen percent of their holding, or an amount that produces meaningful life change without being a retirement. Selling a large fraction reads as a loss of belief, and investors treat it accordingly.

Every secondary carries an implicit message about how the seller values their own shares. A founder selling a small slice to buy a home is understood. A founder selling a third of their position immediately raises the question of what they know that the buyers do not.

The way to manage this is to raise it first, frame the amount, and tie it explicitly to a personal reason rather than a view on the company. Investors who hear about a secondary from someone else react far worse than investors who agreed the plan.

Founder shares are common stock, which lacks the liquidation preference and protective rights attached to preferred. Secondary buyers therefore often pay a discount to the concurrent round price — commonly ten to thirty percent — reflecting that difference in rights.

Tax treatment varies by jurisdiction and holding period, and the difference between the sale price and the original cost is generally taxable in the year of sale. In some jurisdictions long-held founder stock in qualifying small companies receives materially better treatment, which can make the timing of a sale worth several percentage points of the proceeds. This is one of the few areas where professional advice reliably pays for itself.

Larger private companies increasingly run structured tender offers, in which an investor offers to buy a fixed amount of stock from employees at a set price during a defined window. This solves a real retention problem: employees holding valuable but illiquid options often leave partly because they cannot access any of that value.

Tender offers are administratively heavy, require careful valuation work, and can create tax events for participants, so they tend to appear only once a company is large. When they do appear, they are usually a strong signal of confidence rather than the opposite.

Asking too early is the frequent one. A seed-stage founder requesting liquidity is asking investors to fund a lifestyle before the risk has been retired, and the request itself damages the relationship.

The other is selling without understanding the tax position, which can turn a life-changing sum into a considerably smaller one, and occasionally into a liability that arrives a year later.

Garage to IPO tracks founder equity as the real scoreboard, and the founder ledger in career mode records what each run actually paid out. Selling shares — through an exit, a post-IPO sale or an acquisition — converts that paper ownership into capital you can carry into the next venture.

The simplification is that the game does not model discounts, transfer restrictions or tax. What it does capture is the underlying tension: ownership that only becomes real when something converts it, and every round that came before quietly determining how much is left.