In this article, we delve into the world of private secondary sales, shedding light on what they are, how they work, and the benefits they offer to stakeholders. As an advocate for startup employees, the ESO Fund believes it's crucial to provide insights into this growing market, empowering individuals with knowledge to make informed decisions regarding their equity.

What Is a Secondary Sale?

A secondary sale is a transaction where an existing shareholder sells their shares in a private company to another investor. Rather than selling them back to the company itself, like a primary sale known as a Tender Offer (where a company allows investors to purchase shares from employees), a secondary sale involves selling shares to an outside party, typically via a marketplace.

Secondary sales have become increasingly important as startups stay private far longer than in the past. When companies typically go public within four to five years, employees can afford to wait for an IPO to access the value of their equity. Today, with many companies remaining private for ten years or more, secondary sales are often the only realistic way for employees to achieve liquidity before a formal exit.

It’s also critical to understand the difference between selling shares and selling stock options. In most cases, stock options cannot be sold directly. You must first exercise your options, paying the strike price and any associated taxes, to convert them into shares you legally own. Only owned shares can be sold in a secondary transaction, which is why exercise cost and tax planning often determine whether a secondary sale is feasible.

Finally, secondary sales are rarely frictionless. Most private companies impose transfer restrictions in their equity plans or shareholder agreements, often including a right of first refusal (ROFR) that gives the company or existing investors the ability to match a proposed sale. As a result, secondary transactions typically require company approval and legal coordination, making preparation and timing just as important as finding a buyer.

How to Sell Private Company Shares on the Secondary Market

Selling private company shares on the secondary market can provide early liquidity—but the process is more involved than selling public stock. Unlike public markets, private shares are illiquid, heavily restricted, and subject to company approval. Below is a step‑by‑step guide to how secondary sales typically work.

Step 1: Review your shareholder agreement

Before doing anything else, carefully review your stock purchase agreement, option agreement, and shareholder agreement. Look for transfer restrictions, Right of First Refusal (ROFR) clauses, lock‑up periods, and any requirements for company or board approval. Many private companies require written consent before shares can be transferred to an outside buyer. If your agreement prohibits secondary sales entirely, you may need to explore alternative liquidity options such as company tender offers or option‑exercise financing instead.

Step 2: Determine what you actually own

Next, clarify whether you hold exercised shares, vested but unexercised stock options, or RSUs. Only owned shares can be sold on the secondary market. If you hold unexercised options, you will typically need to exercise them first, converting the options into shares. This requires paying the exercise price and may trigger a tax event. (In some cases, the exercise cost can be covered through non‑recourse financing, allowing you to exercise without using personal cash.)

Step 3: Choose a secondary marketplace

The secondary market consists of platforms that connect sellers with institutional buyers. Marketplaces such as Forge, EquityZen, or Zanbato each have different fee structures, minimum transaction sizes, approval processes, and liquidity profiles. The right platform depends on the size of your position, how in‑demand your company’s shares are, and how quickly you need liquidity. Smaller positions or less well‑known companies may have fewer buyer options.

Step 4: Verify and list your shares

To list your shares, you’ll need to verify ownership by providing documentation such as a stock certificate, option grant notice, or confirmation from the company’s cap table or equity portal. Once verified, the platform will list your shares and begin matching you with potential buyers.

Step 5: Negotiate and agree on a price

Pricing in the secondary market is driven by supply and demand, not by a quoted market price. Buyers submit bids, and sellers choose whether to accept. Private shares often trade at a discount to the most recent funding round—commonly 10–30%—though highly in‑demand companies may trade at par or even at a premium. A common reference point is the last preferred share price, adjusted for liquidity, risk, and timing.

Step 6: Obtain company approval (ROFR)

Once a buyer and seller agree on price and terms, the company is notified. The company (or its investors) typically has a 30‑day window to exercise its ROFR and purchase the shares itself at the agreed price. If the ROFR is waived, the transaction proceeds with the outside buyer.

Step 7: Complete the transfer and receive payment

If approval is granted, the company’s transfer agent processes the share transfer. Funds are released to the seller, and settlement usually occurs one to two weeks after final approval.

Top Secondary Marketplaces Compared

Several platforms facilitate secondary transactions for private company shares, allowing employees and investors to sell equity before an IPO or acquisition. These secondary marketplaces differ meaningfully in fees, minimum transaction sizes, and how much control sellers have over pricing and buyers. Platform availability, company coverage, and fee structures can change over time. The comparison below reflects current (2026) market norms.

How Secondary Market Pricing Works

Secondary market pricing for private company shares is driven by negotiation, not a quoted market price. While the mechanics resemble public markets in some ways, pricing in private secondaries is less transparent and varies from deal to deal.

Bid‑ask dynamics

Pricing on the secondary market works like any other market: buyers submit bids and sellers set asking prices. The final transaction price is negotiated between the two parties. Unlike public stock markets, there is no centralized exchange or real‑time price feed for private shares. Even on established platforms, prices are determined transaction by transaction, based on current demand, available supply, and company‑specific factors.

Discounts to the last funding round

In most cases, secondary market shares trade at a discount to the most recent funding round valuation. Discounts of 10–30% are common, though they can be wider for companies with uncertain prospects or limited buyer interest. This discount reflects illiquidity risk: buyers are purchasing shares that may be difficult to resell and have no guaranteed timeline to a liquidity event such as an IPO or acquisition.

When shares trade at a premium

In some situations, secondary shares can trade at par or even at a slight premium to the last funding round, typically for companies with strong revenue growth, high investor demand, or a widely expected near‑term IPO. While uncommon, premium pricing does occur for high‑profile, late‑stage companies with limited available supply, especially when a liquidity event or new funding round appears imminent.

Factors that affect pricing

Several variables influence secondary market pricing, including:

• Company financial performance and growth trajectory
• Time elapsed since the last funding round
• Broader market conditions and risk appetite
• Expectations around IPO timing or acquisition likelihood
• Share class (preferred vs. common)
• Size of the block being sold (larger blocks may receive volume discounts)

How to assess whether a price is fair

To evaluate a proposed secondary price, compare it against three reference points:

1. The company’s most recent 409A valuation
2. The last funding round price, adjusted for share‑class differences
3. Recent secondary transactions for the same company, where available through platforms or private market data providers

Together, these benchmarks provide context for whether a secondary market payout is reasonable given current conditions.

Tax Implications of Secondary Sales

Taxes are one of the biggest factors to consider before selling private company shares on the secondary market. The exact tax treatment depends on how you acquired the shares, how long you’ve held them, and the type of equity involved.

Capital gains treatment

When you sell shares on the secondary market, the gain (sale price minus your cost basis) is generally subject to capital gains tax. If you held the shares for more than one year, the gain qualifies for long‑term capital gains rates (0%, 15%, or 20%, depending on your income). If you held the shares for one year or less, the gain is taxed as short‑term capital gains at your ordinary income tax rate.

Understanding your cost basis

Your cost basis is what you paid to acquire the shares. For exercised stock options, this is the exercise (strike) price. Getting the cost basis right is critical, as it directly determines how much of your secondary sale proceeds are taxable.

ISO vs. NSO considerations

For Incentive Stock Options (ISOs), tax treatment depends on whether you meet the holding requirements. If you exercised and held the shares for at least one year after exercise and two years after the grant date, the gain on a secondary sale is taxed as long‑term capital gains. If you sell before meeting those requirements, the sale becomes a disqualifying disposition, and the spread at exercise is taxed as ordinary income.

For Non‑Qualified Stock Options (NSOs), the spread at exercise is always taxed as ordinary income, regardless of how long you hold the shares. Any additional gain above the fair market value at exercise is taxed as capital gains when you sell.

QSBS eligibility

If your shares qualify as Qualified Small Business Stock (QSBS) and you’ve held them for at least five years, you may be able to exclude up to $10 million (or 10× your cost basis) in gains from federal tax under Section 1202. This can be a major benefit for long‑term holders. Learn more in our QSBS overview.

State taxes

State taxes can materially increase your total tax bill. For example, California taxes capital gains as ordinary income, with rates up to 13.3%. Because state treatment varies widely, it’s especially important to consult a qualified tax advisor before completing a large secondary transaction.

Differentiating ESO Fund

ESO Fund plays a unique role in the secondary market as both a buyer and seller. While our primary focus is on stock option exercise funding, our approach closely aligns with a secondary sale. We provide an avenue for partial liquidity beyond exercising your stock options, allowing you to capitalize on your vested equity, but also use the secondary market as an avenue for liquidity for us and our clients.

There are several key differences that set ESO Fund apart from traditional secondary market participants:

1. Direct Counterparty: As a fund, ESO Fund acts as the direct counterparty in transactions, eliminating the need for a broker.
2. Partial Purchase: Unlike complete share purchases, ESO Fund typically acquires only a portion of the shares, enabling you to maintain a long position in your stock.
3. Share Ownership Transfer: ESO Fund transactions do not require the transfer of share ownership, providing a unique advantage for employees seeking liquidity.

The Future of the Secondary Market

While the secondary market is still evolving, it presents an increasingly popular option for pre-IPO liquidity. As startups stay private longer and achieve higher valuations, the secondary market offers employees with significant "on-paper" wealth an opportunity to unlock value and reduce risk.

Conclusion: Private secondary sales offer a pathway to liquidity and value realization for employees holding private stocks. Understanding the nuances of this market empowers individuals to make informed decisions about their equity compensation. At ESO Fund, we support our clients by providing guidance and insights into the secondary market. If you have opportunities to sell on the secondary market, our ESO Fund Equity Partners are ready to discuss the process and share market insights specific to your company.

As the secondary market matures, it becomes an increasingly more valuable tool for employees navigating the complexities of equity compensation. By staying informed and exploring the potential benefits, individuals can leverage the secondary market to unlock the value of their private company holdings.

For more information and personalized assistance, please contact us below.

‍

Written by Jordan Long, Marketing Lead at ESO Fund