Secondaries Explained: Liquidity Without an IPO

If you have ever held equity in a private company, you know the trade-off. The upside can be compelling, but liquidity is often the missing piece. In public markets, liquidity is built in. You can sell shares any trading day. In private markets, you usually wait for an acquisition, an initial public offering (IPO), or some other major event that may take years, or may never happen.

That is where secondaries come in.

A “secondary” transaction is simply the sale of an existing ownership stake in a private company. It can provide a form of liquidity without an IPO, but it comes with its own rules, risks, and practical realities. This guide breaks down how secondaries work, why they exist, who uses them, and what accredited investors should understand before considering them.

Important note: This article is for educational purposes only and is not investment advice or a recommendation to buy or sell any security. Private investments are speculative, involve significant risk, may be illiquid, and investors can lose some or all of their investment. Many private securities are offered only to accredited investors and may be subject to transfer restrictions.

What “secondaries” actually means

In investing, you will hear two phrases:

• Primary issuance: A company sells new shares to raise money (for example, a Series B round). The proceeds go to the company.

• Secondary sale (secondary transaction): An existing shareholder sells shares to another buyer. The proceeds go to the seller, not the company.

So when people say “the secondary market” for private companies, they mean a set of transactions where ownership changes hands without the company issuing new shares.

Secondaries can happen at many stages: early, late, and even years after a company becomes “IPO-ready” but stays private. They can also happen in private funds (like venture capital funds), where an investor sells their fund interest to someone else. This article focuses mainly on private company secondaries, but many concepts apply broadly.

Why secondaries exist (and why they have grown)

Secondaries have been around for decades, but they have become far more common for a few reasons:

1) Companies are staying private longer

Many high-growth companies now remain private well beyond the stage when earlier generations might have gone public. That can be good for founders and early investors, but it means employees and early shareholders often face a long wait for liquidity.

2) Employee equity is a bigger part of compensation

Stock options and restricted stock units (RSUs) can create meaningful wealth on paper. But “paper wealth” is not spendable until shares can be sold, and selling may be restricted.

3) Investors want flexibility

Early investors may want to reduce concentration, manage cash needs, or rebalance portfolios without waiting for an IPO or acquisition.

4) Companies sometimes prefer secondaries to primaries

A company may not want to raise new capital (and dilute existing shareholders) but may want to support employee retention by enabling limited liquidity.

Secondaries are not a perfect substitute for an IPO. They are often more complex, less liquid, and less transparent. But they can be a pressure release valve in a market where private holding periods have expanded.

Who participates in secondary transactions?

Secondaries can involve a wide range of sellers and buyers.

Common sellers

• Employees and former employees exercising options and selling shares (subject to company approval and plan rules).

• Founders seeking partial liquidity (sometimes to diversify personal balance sheets).

• Angel investors reducing exposure or returning capital.

• Early-stage venture funds nearing the end of their fund life.

• Later-stage investors repositioning portfolios.

Common buyers

• Institutional secondary funds specializing in private liquidity.

• Family offices and accredited investors (in some contexts).

• Venture funds topping up exposure to later-stage companies.

• Strategic buyers (less common, but possible).

Depending on the structure, the “buyer” may be a direct purchaser of shares, or may invest through a vehicle that acquires the shares.

The main types of private secondaries (with plain-English examples)

Secondaries are not one single product. Here are the most common forms.

1) Direct share purchases from existing holders

Example: An early employee wants to sell 20% of their vested shares. A buyer purchases those shares directly, subject to company transfer rules and approvals.

This is the simplest conceptually, but it can still be operationally complex.

2) Company-sponsored tender offers

Example: The company offers to buy back shares from employees at a set price, or it arranges for an investor to buy shares from employees during a defined window.

Tender offers can be more organized and standardized, but participation and pricing are typically controlled by the company and may be limited.

3) Structured secondary transactions

These can include preferred terms, downside protections, or other structures that differ from “common stock at a price.” Structures vary widely and can materially change risk and return characteristics.

Because structures can be complex, investors should understand the exact security being purchased and how it sits in the company’s capitalization table (cap table).

4) Fund secondaries (selling fund interests)

Instead of buying shares of a company, a buyer purchases an interest in a private fund from an existing limited partner (LP). This is a large and sophisticated market of its own, often with different diligence needs.

“Liquidity without an IPO” is an option, but it is not the same as public liquidity

Secondaries can provide liquidity, but it is usually:

• Event-driven: Liquidity happens when a transaction window opens, not when you feel like selling.

• Permissioned: Transfers may require company approval and can be denied.

• Limited: You may be able to sell only a portion of holdings, or only at certain times.

• Priced differently: The “price” may be negotiated, discounted, or influenced by limited information.

In public markets, price discovery is continuous and visible. In private secondaries, price discovery is often partial and sometimes opaque. That does not make secondaries “bad.” It just means the mechanics and risks are different.

How pricing works in a secondary transaction

Pricing is often the first thing people ask about, and it is where misconceptions are common.

Common reference points for pricing

• The most recent primary financing round price (for preferred shares).

• 409A valuation (commonly used for option pricing; often lower than preferred round pricing).

• Company performance and trajectory since the last round.

• Market conditions and risk appetite.

• Share class and rights (common vs preferred; liquidation preference; voting rights; information rights).

• Supply and demand for that company’s shares.

Discounts are not unusual. A secondary buyer may require a discount to compensate for:

• Lack of liquidity.

• Limited information rights.

• Uncertainty around timing of an exit.

• Potential future dilution.

• Transfer restrictions.

• The possibility that the last round price is stale.

A “discount” is not automatically a bargain. It can reflect real risk. Conversely, some hot companies can trade at a premium, but paying a premium for a private security introduces its own set of risks.

The cap table matters more than most people realize

Two people can both say “I own shares in Company X” and have very different outcomes.

Key cap table concepts to understand:

Common stock vs preferred stock

• Common stock (often held by employees and founders) typically sits behind preferred stock in liquidation.

• Preferred stock (often held by venture investors) may have liquidation preferences and other rights.

Liquidation preference

A liquidation preference can mean preferred shareholders get paid back first (sometimes more than their investment) before common shareholders receive anything in an acquisition or liquidation.

This can materially impact the value of common shares, especially if the company sells for less than the preferred stack.

Dilution

Even if a company grows, issuing new shares in future rounds can dilute existing holders. Dilution is normal, but it affects how much of the company a share represents.

Secondary buyers should understand not just the headline valuation, but the fully diluted cap table and the terms of outstanding preferred.

Transfer restrictions and approvals: the “hidden gate” in private secondaries

Unlike public shares, private company shares often cannot be freely transferred.

Common restrictions include:

• Right of first refusal (ROFR): The company or existing investors may have the right to buy the shares before an outside buyer can.

• Co-sale rights: Certain parties may have rights to participate in a sale.

• Company consent requirements: The board may need to approve the transfer.

• Securities law limitations: Sales may need to meet exemption requirements and investor eligibility standards.

In practice, this means a potential secondary transaction can be delayed, modified, or blocked. Anyone considering a secondary should assume that closing is not guaranteed until approvals and documentation are complete.

Why sellers choose secondaries (and why it is not always a red flag)

A common misconception is: “If someone is selling, they must think the company is in trouble.”

Sometimes that is true. But often it is not.

Legitimate reasons sellers pursue secondaries:

• Paying taxes related to option exercises or RSU vesting.

• Buying a home or managing life events.

• Reducing concentration risk (having most net worth tied to one private company can be stressful).

• Diversifying after years of illiquidity.

• Fund lifecycle management (VC funds returning capital to LPs).

A secondary sale can be a rational financial decision, not a negative signal. The important question is not “why is someone selling?” but “what do I know about what I’m buying, and what risks am I taking?”

Why buyers like secondaries

From an accredited investor’s perspective, secondaries can be attractive because they may offer:

• Later-stage exposure: Sometimes closer to potential liquidity events than early venture investing.

• Potential pricing inefficiencies: Private pricing can lag reality, in both directions.

• Portfolio construction benefits: Access to companies that may not be raising a primary round.

• Selective entry: In some cases, investors can target specific companies rather than committing to a blind pool.

That said, none of these are guarantees. Later-stage does not mean lower risk, and proximity to an IPO does not mean an IPO will happen.

The big risks to understand (plain, direct, and important)

Secondaries can be compelling, but they can also go wrong in ways that are easy to underestimate. Here are the risks that matter most.

Illiquidity risk

Even after purchasing in a secondary, you may not be able to sell when you want, or at all. Liquidity events may be delayed or never occur.

Valuation risk

Private valuations can be stale. The last round price may not reflect current fundamentals or market conditions. A down round can reduce the value of prior holdings.

Information asymmetry

Private companies disclose less than public ones. Buyers may have limited access to financials, customer metrics, or forward-looking information. This can make diligence harder.

Legal and transfer risk

ROFRs, consent requirements, and contractual limitations can block transfers or restrict future resale.

Cap table and terms risk

Preferred rights, liquidation preferences, and participation features can impact outcomes, especially for common stock.

Concentration risk

It is easy to end up overexposed to a single company, sector, or theme, particularly in private markets where position sizes can be chunky relative to portfolio size.

Regulatory and eligibility considerations

Private securities transactions are subject to securities laws and are often limited to accredited investors. Investors should understand suitability, eligibility, and documentation requirements.

What diligence looks like in a secondary (and what you should ask)

In public markets, you can read filings and see prices. In private secondaries, diligence is more bespoke. If you are evaluating a secondary opportunity, here are practical areas to explore.

Company basics

• What does the company do, and why does it win?

• How does it make money?

• What are the key drivers of growth and retention?

Financial and operating health (where available)

• Revenue, margins, burn, runway.

• Unit economics (for example, customer acquisition cost vs lifetime value).

• Cohort retention and churn (for subscription businesses).

Exit path and timeline

• Is an IPO realistic, and on what timeline?

• Are there plausible acquisition outcomes?

• Is the company actively raising, conserving cash, or restructuring?

Security details

• What share class am I buying?

• What rights come with it (or not)?

• How does it rank in liquidation relative to other securities?

Transfer mechanics

• What approvals are required?

• Is there a ROFR?

• What is the expected timeline to close?

• Are there holding period or resale restrictions?

No diligence checklist eliminates risk, but better questions tend to prevent the most avoidable surprises.

How secondaries fit into a broader portfolio

Secondaries are best understood as one tool in a broader allocation plan.

For many accredited investors, private investments may represent a smaller portion of net worth due to:

• Illiquidity.

• Longer time horizons.

• Uncertainty of outcomes.

• The need for diversification across strategies and vintages (the year you invest matters in private markets).

If you are building a portfolio that includes both public and private assets, it can help to view secondaries through a portfolio lens:

• What role does this position play?

• How concentrated will I be after investing?

• What is my time horizon if liquidity takes longer than expected?

• Can I financially and emotionally hold through uncertainty?

Where platforms like Braintrust can help (without replacing your judgment)

Private market investing is often fragmented: different portals, different documents, different reporting formats, and different workflows. That is one reason many investors stay on the sidelines.

A platform like Braintrust is built to make the experience more centralized by helping accredited investors research, access, and manage investments across private and public markets in one place, alongside tools like portfolio tracking and educational content (such as webinars and video research).

If you are exploring private investments, including potential secondary opportunities, a practical next step is to use a platform that helps you stay organized: track what you own, review materials in a consistent format, and maintain a clear view of how private positions sit next to your public portfolio. You can learn more at braintrustinvest.com.

Reminder: Access to private investments does not reduce risk. It increases the importance of diligence, diversification, and understanding liquidity constraints.

Common myths about secondaries (quick corrections)

Myth 1: “Secondaries are basically guaranteed pre-IPO wins.”

Reality: Many private companies never IPO. Some are acquired at lower valuations than expected. Some fail.

Myth 2: “The last funding round price is the true price.”

Reality: A primary round price is one data point. Terms matter, time has passed, and market conditions shift.

Myth 3: “If it is later-stage, it is safer.”

Reality: Late-stage companies can still face major risks: competition, margin compression, financing risk, and macro sensitivity.

Myth 4: “I can sell whenever I want.”

Reality: Liquidity is episodic and permissioned in private markets.

The bottom line

Secondaries are best described as liquidity options inside a traditionally illiquid world. They can help employees, founders, and early investors turn a portion of paper value into real money, and they can give accredited investors a way to gain exposure to private companies without participating in a primary round.

But secondaries are not “public-market liquidity in disguise.” They come with transfer restrictions, limited information, complex cap tables, and real valuation risk. If you treat them with the same seriousness you would apply to any concentrated, illiquid investment, they can be a useful part of a broader strategy.

If you are evaluating private market opportunities and want a more organized way to research and manage both private and public holdings, you can explore Braintrust at braintrustinvest.com.

Disclosure: This content is provided for informational and educational purposes only and does not constitute investment advice, a recommendation, an offer to sell, or a solicitation of an offer to buy any security. Private securities are speculative, involve a high degree of risk, may be illiquid, and are not suitable for all investors. Past performance is not indicative of future results. Investors should consult their legal, tax, and financial advisors before making investment decisions.