What is a founder secondary?

A founder secondary is the sale of some of your existing shares to an investor, usually as part of a funding round. The money from a secondary goes to you as the seller. The money from new shares, called the primary, goes into the company.

A secondary works like a small, partial exit. You keep most of your shares and your role, and you take a small amount off the table long before the company is sold.

Peter Möllmann is a partner at PXR, one of the leading tech M&A (mergers and acquisitions) law firms in DACH (Germany, Austria and Switzerland). He negotiates some of the largest growth rounds in the region, such as a $500 million Series C at Stark, $410 million at Vay and €240 million at Amboss. He also works for funds such as Battery Ventures, Creandum and Union Square Ventures. In my CEO Briefing on designing the round before the term sheet, he explains how a founder secondary fits into a round.

Why would a founder sell shares before an exit?

The main reason is risk. Think of a founder who is eight years into a venture-backed company. In many cases that founder holds three things:

• One illiquid asset: shares in the company that cannot easily be sold.
• An outsized personal risk profile: the founder's personal risk is tied to one company.
• Peers on a different path: friends who made partner somewhere and draw a very comfortable salary.

If everything stays in the company, at some point decisions can start to be made for personal security instead of for the company. A founder who has taken a small amount off the table can keep taking risk with the rest of the shares. In my CEO Briefing I summed it up in one sentence: “A small secondary buys alignment.”

The argument for a founder secondary is risk allocation. It is a question of alignment between the founder and the company.

When is the best moment to ask for a founder secondary?

The easiest moment is an oversubscribed round, meaning investors want to put in more money than you want to raise. The extra demand gives the secondary an obvious place in the round.

Peter's example: two lead investors both want to invest 20 million, and you only want to raise 30. The secondary absorbs the capital you cannot otherwise take. With it, you can do three things at once:

1. Clean up the cap table: the cap table is the list of who owns which shares on which terms.
2. Buy out the pre-seed angels: the private investors who backed the company in its very first round.
3. Sell a small part of your own shares: your personal secondary.

Without excess demand, the conversation still works. It then rests on your argument instead of on the arithmetic of the round.

How large can a founder secondary be?

It depends on the stage of the company and on how much demand the round has. Peter gives this calibration:

• Series A: a six-figure secondary is workable. Seven figures triggers real discussion and depends on how oversubscribed the round is.
• Series B onward: a seven-figure secondary is common.
• A round that barely closes: the honest answer is that you take nothing.

Series A, B and C are the numbered funding rounds that follow a startup's seed round. The numbers help you calibrate before you ask, so the request matches what the round can carry.

How do investors react when a founder asks for a secondary?

Peter has never seen a deal fall apart because a founder asked for a secondary. The reaction you can expect is often personal rather than economic.

Two factors shape it:

• The fund's own history: a partner who has built a strong portfolio but has not yet returned a single euro to the fund's own investors, the LPs (limited partners), tends to be more sensitive about a founder taking money out.
• The investor's origin: American investors are generally the more relaxed party on terms. On secondaries, they tend to be more reserved.

Peter can name which funds react strongly against the word. For a founder, the practical step is to know who sits across the table before you raise the topic.

How do you build a founder secondary into the round?

You put it into the model of the round before any term sheet exists. A term sheet is the short document with the main terms of an investment. In growth rounds, the valuation and the allocation are usually settled in a spreadsheet two or three weeks before the term sheet arrives.

The steps:

1. Build one cap table for the whole round: how much you want to raise, how much each interested lead wants to invest, which existing investors use their pro rata right to invest again and keep their percentage, whether early angels get bought out, and whether you take a secondary and how large.
2. Model the scenarios: this investor as lead instead of that one, 30 million instead of 40, a larger secondary against a smaller primary.
3. Align the sheet with your investors: valuation and structure together. The partner at a fund needs a soft okay from the investment committee, the group inside the fund that approves deals, before issuing a term sheet. That okay rests on the number and structure you agreed on.

When the term sheet arrives, the secondary is already written into the agreed cap table. Nobody negotiates it there, because the conversation already happened. Founders who skip the modelling often end up negotiating their own liquidity as a concession. Founders who run it arrive with a structure and a rationale.

The same logic can work from the other side. In my CEO Briefing on Zoé Fabian-Frey and the Tink exit, Zoé is General Partner and co-founder of Noteus Partners, an independent European growth investor. She describes how her team got into Tink, a Swedish open banking company that was later sold to Visa. The way in was an angel investor who considered selling shares. He never did, but her team got data and could run a fast process. A shareholder who is open to selling can be the first contact for a new investor.

What does a founder secondary change for a later exit?

A secondary changes who holds the shares when a buyer arrives. That matters, because a cap table is written for a financing event, and an exit is a different transaction.

In my CEO Briefing on cap tables at exit, Peter describes how shareholders who entered at different prices want different things in a sale. An early investor sitting on a 50x return at the offer price wants to sell now. A late investor with a 2x liquidation preference, the right to be paid twice its investment first, may want to wait. Thirty shareholders can mean thirty different incentive structures in one exit process. Buying out early angels during a round reduces the number of people at that table.

The growth round also creates an imbalance that you should know while you allocate it. The growth investor pays the highest price, carries the highest risk and ends up with three or four percent. The seed investor holds ten percent with much less risk. Board seats, drag-along rights, exit rights and downside protection are all negotiated downstream of that gap. Drag-along rights let a majority of shareholders require the others to join a sale. Knowing the gap early tells you which investor will push for what, so you can design around it.