Secondary Alternatives for Founders

Most founders first hear about secondary as an easy way to turn equity into cash. All they need to do is sell a small portion of shares, take some liquidity off the table, and keep building the company. 

‍

But secondary usually comes with pricing discounts, tax consequences, investor approvals, and a process that takes far more time and attention than founders expect. For some founders, that tradeoff makes sense, but for others, it’s the reason they start looking for alternatives.

‍

In this guide, we lay out how secondary works in practice and the other paths founders consider when managing liquidity and risk.

‍

What is a secondary sale? (Secondary liquidity explained)

A secondary sale is when a founder or early employee sells existing shares in a private company to a new buyer before an IPO or acquisition.

‍

It should not be confused with issuing new shares or raising capital for the company. It's actually a personal liquidity transaction. You are converting part of your equity into cash while the company remains private.

‍

Secondary sales usually happen after a company has raised at least one institutional round and has an externally priced valuation. It’s at this point that founders realize the gap between their paper wealth and their personal liquidity. For example, their company could be worth tens or hundreds of millions on paper, but the founder’s day-to-day finances are still constrained.

‍

For many founders, secondary is the first liquidity option they discover. In some cases, it is the right move. But founders usually find out about the real cost of secondary at the same time they discover the option itself.

‍

The transaction is typically taxable. Approvals and legal processes can add friction and delay. And access to real buyers is uneven, depending on company, round, and market conditions.

‍

Because of these tradeoffs, secondary is best understood as one liquidity tool, not the default or only option. Many founders use it, but many others look for alternatives once they fully understand what secondary actually entails.

‍

Who needs secondary liquidity?

Founders don’t pursue secondary liquidity because they want to “cash out.” They use secondary because their financial reality lags far behind their company’s valuation.

‍

For instance, a founder might own 60–80% of a startup valued at $100 million on paper, yet still be paying themselves a modest salary while the company burns venture capital. Their equity is illiquid, the business is unprofitable, and nearly all of their net worth is tied up in one asset they cannot sell freely. On paper, they are wealthy. In practice, they have limited cash and little financial flexibility.

‍

Secondary liquidity typically becomes relevant when founders want to:

‍

• Reduce concentration risk by taking some exposure off a single, high-risk asset
• Create personal financial stability, such as buying a home or building a cash buffer
• Cover tax obligations triggered by option exercises or other equity events
• Rebalance after years of under-market compensation
• Reduce personal stress and operate more effectively without constant financial pressure

‍

While founders are the most common users of secondary liquidity, early employees and angel investors sometimes pursue it for similar reasons. The difference is scale. Founders usually hold the largest stakes and feel the liquidity constraint most acutely.

‍

Secondary is used to align personal finances with value already created, while continuing to build the company for the long term.

‍

How a secondary sale works for founders

A secondary transaction allows a founder or early employee to sell a portion of their existing shares in a private company to a new buyer. That buyer is typically a secondary fund, a private-market platform, or a strategic investor seeking exposure to late-stage private companies.

‍

In practice, a secondary transaction usually unfolds in the following steps:

‍

• Finding a buyer: The seller identifies a buyer willing to purchase private shares. Demand varies widely based on company profile, brand recognition, recent fundraising activity, and overall market conditions. Not every company has an active secondary interest at all times.

• Agreeing on price: The transaction price is typically set at a discount to the most recent funding round valuation. Discounts of 10–20% are common, and can be higher depending on liquidity, timing, and perceived risk.

• Company and investor approvals: Most private companies have rights of first refusal (ROFRs) or other transfer restrictions. This means the company and existing investors often have the right to approve, block, or match the transaction before it can proceed.

• Legal documentation and closing: Once approved, lawyers draft and finalize the transfer documents. Even when all parties are aligned, this process can take weeks and sometimes stretches into months due to review cycles and administrative friction.

• Cash payout and taxes: After closing, the seller receives cash. In most cases, this is a taxable event. Capital gains taxes may apply depending on jurisdiction, holding period, and structure.

‍

This process feels straightforward and is why founders often consider secondary. But it’s actually much slower and more expensive than it appears, as there are additional discounts, taxes, approvals, and legal work that slow the process and increase the costs. 

‍

Pros and cons of secondary

Secondary is often the most visible and straightforward liquidity option available to founders. It can be effective, but it comes with clear tradeoffs that are easy to underestimate at first glance. Below, we list some pros and cons worth considering. 

Pros of secondary

• Simple framework: You sell shares and receive cash. There are no multi-step instruments or unfamiliar structures to learn.
• Immediate liquidity: Secondary provides cash now, not at some future liquidity event.
• Clear outcome: Once the transaction closes, the result is final and easy to understand.
• Broad market familiarity: Many founders, investors, and advisors already understand how secondary works, which can reduce initial hesitation.
• Works in many situations: Secondary can be used even when a founder does not qualify for more structured or tax-optimized alternatives.

Cons of secondary

• Discount to valuation: Secondary transactions are typically priced below the latest funding round valuation. Discounts of 10–20% are common, and can be higher depending on demand and timing.
• Taxable event: Selling shares typically triggers capital gains taxes, reducing the net cash a founder actually keeps.
• Approval and process friction: ROFRs, investor approvals, and legal reviews can slow or block transactions entirely.
• Uneven market access: Not every private company has real secondary demand. Liquidity depends heavily on brand, momentum, and recency of the last round.
• Time and cognitive cost: Even “simple” secondary deals can take weeks or months and require ongoing attention during an already demanding period for founders.
• Perceived signaling risk: Some founders worry about how a secondary sale might be interpreted by investors or employees, even when the decision is rational and limited in scope.

‍

Secondary alternatives and how to think about them

Once founders realize secondary isn’t the only path to liquidity, they can consider other alternatives based on what they value most. There are various options available, depending on whether a founder cares more about speed, taxes and fees, or reducing risk. 

The options below are not ranked. Each one solves a different problem, and understanding why it exists is more useful than memorizing how it works.

‍

Borrowing against shares (equity-backed loans)

Equity-backed loans allow founders to borrow cash using their startup shares as collateral. The founder does not sell equity outright. Instead, a lender underwrites the value of the shares and provides a loan that must be repaid over time, usually with interest and covenants. 

‍

Because private company equity is illiquid and risky from a lender’s perspective, these loans are typically conservative. Founders are often required to pledge significantly more equity value than the cash they receive. If repayment obligations are not met, the lender can seize the pledged shares.

Pros

• Familiar and easy to understand structure
• Can provide relatively fast access to cash
• Avoids an immediate equity sale
• May avoid a taxable event at the time of borrowing

Cons

• Requires repayment, creating ongoing cash flow pressure
• Interest costs can be high
• Aggressive collateral terms (such as $3M cash for $10M in shares)
• Risk of losing a large equity position if you default
• Restrictive lender covenants and underwriting

‍

Structured tender offer run by the company

A structured tender offer is a company-led liquidity program that gives founders and employees a controlled opportunity to sell a portion of their shares. Instead of individual shareholders sourcing buyers on their own, the company coordinates the process by selecting approved buyers, setting a price or pricing range, and defining eligibility rules and sale limits. 

The offer runs during a fixed window and typically requires board and investor approval. For founders, tender offers provide access to liquidity within an established framework, but participation is optional, and timing is entirely driven by the company’s priorities rather than individual needs.

Pros

• Standardized rules, pricing, and timelines reduce uncertainty
• Centralized process minimizes one-off negotiations and signaling concerns
• Often cleaner execution than ad hoc secondary transactions
• Can provide liquidity to multiple stakeholders simultaneously

Cons

• Founder has no control over when a tender offer occurs
• Pricing, eligibility, and sale size are set by the company
• Liquidity may be limited to a small portion of holdings
• Typically taxable and subject to approvals from investors and the board

‍

Exchange fund structures

Exchange fund structures allow founders to convert a portion of their concentrated equity into a mix of immediate liquidity and diversified exposure without selling shares at a discount. 

‍

So instead of selling equity outright, the founder contributes shares to a fund at the valuation from the most recent funding round. In return, part of the value is paid out in cash, while the remainder is delivered as ownership in a diversified portfolio of other venture-backed companies.

‍

For example, a founder could contribute 10% of their company, receive cash equal to 5% of the company’s value, and hold the remaining 5% as ownership in the diversified fund. 

‍

This approach can avoid triggering an immediate taxable sale because there is no fixed-price equity transfer at the time of the exchange. Founders get near-term liquidity, reduce single-company risk, and gain exposure to a broader venture portfolio. These structures also create a community in which participants are aligned with one another’s outcomes. 

‍

Funds like Accumulator focus on this model specifically for later-stage startups, which is why these structures are usually limited to companies with valuations above $100M and recent institutional rounds. 

Pros

• No valuation discount
• Diversification across multiple venture-backed companies
• Can be structured to avoid immediate capital gains taxes
• No repayment obligation or leverage risk

Cons

• More complex legal and structural setup
• Eligibility limited to later-stage, high-valuation companies
• Requires trust in portfolio valuation and fund management

‍

Tax-optimized forward structures

A tax-optimized forward structure uses a variable-price forward contract instead of a traditional equity sale. This path requires the founder to agree to transfer economic exposure to a portion of their equity. The exact number of shares is typically determined later.

‍

This is an alternative to selling shares at a fixed price today, and it typically occurs during a liquidity event, such as an acquisition or an IPO. And since the price per share is not fixed at the time of the agreement, the transaction can be structured to avoid triggering capital gains taxes upfront. 

‍

This structure allows founders to reduce concentration risk and gain diversification exposure without selling shares at a discount or creating a taxable event today.

Pros

• Designed to avoid immediate capital gains taxes
• No forced valuation discount like a traditional secondary
• Allows founders to address risk earlier

Cons

• Difficult to understand and unfamiliar to most founders
• Heavy legal structure with multiple documents
• Learning curve causes procrastination by founders
• Advisors may slow or kill deals by emphasizing edge-case risks

‍

Doing nothing and delaying liquidity

Doing nothing means the founder keeps their equity unchanged and delays any liquidity decision. There is no transaction, no documentation, and no immediate cost. 

This option is often chosen implicitly rather than intentionally, especially when liquidity is not urgent and complexity feels overwhelming. However, time is not neutral. As rounds age, valuations become stale, investor appetite changes, and eligibility for certain structures can quietly disappear.

Pros

• No distraction from running the company
• No taxes or discounts today
• Zero legal or administrative friction

Cons

• Full concentration risk remains
• Financial stress may continue
• Fewer options if liquidity becomes urgent later
• Older rounds can limit future flexibility

‍

Conclusion

Secondary is commonly one of the first liquidity paths founders consider, largely because it’s the easiest to explain and execute. But once founders look more closely and account for discounts, taxes, approvals, and time, they realize there might be better alternatives out there worth considering.

‍

The alternatives don't necessarily present a perfect structure. Instead, they offer founders options based on which constraint matters most. 

‍

For instance, equity-backed loans prioritize speed and familiarity but introduce leverage and downside risk. On the other hand, tax-optimized forward structures reduce tax friction and concentration risk but require founders to engage with legal complexity. Exchange funds are another option that allows founders to access cash without selling equity outright while also reducing risk, fees, and taxes. But exchange funds are usually only available to later-stage companies with valuations of $100M or more.

‍

If you do nothing, you choose the most straightforward path, but exposure remains unchanged, while company-led tender offers provide coordination at the cost of individual control.

‍

The right choice depends on what the founder is optimizing for at the moment. What matters most is understanding the full cost of each option before defaulting to the one that feels easiest. Liquidity decisions tend to be made under pressure, but the best outcomes usually come from slowing down long enough to evaluate the real tradeoffs involved.

‍