What Security Is the Buyer Purchasing?
A private-company secondary lets an LP buy existing shares in a known business before a public exit, but the company name and apparent discount are not enough to judge the deal. The share class, rights, seller's reason for exiting and transfer process all matter. Carta's Q1 2026 State of Private Markets describes how tender offers and other secondary transactions are providing liquidity while IPO access remains selective.
The opportunity is still a negotiated private security. Its share class and transfer rules determine what the buyer will own. The company's quality determines what that ownership may eventually be worth.
Because many closed-end funds are built around an 8- to 12-year life, secondary transactions often matter most when liquidity arrives later than investors expected.
An employee offers common shares below the price paid in the latest preferred round. The lower quote looks attractive, but the preferred investors receive downside protection and information rights that do not follow the common stock. The buyer must value the common shares on their own terms.
Map the Route to Ownership
SEC Rule 144 generally uses a 6-month holding period for reporting issuers and 1 year for non-reporting issuers. Contractual restrictions can still make a private-company position less liquid.
“Secondary” describes how the position changes hands. A direct purchase can transfer a common or preferred share, while an SPV transaction transfers an interest in a vehicle that owns the company.
Other structures use forward contracts, and company-led tenders create their own eligibility rules. Before valuing any route, identify the asset the buyer will legally own.
Then check whether ownership can actually transfer. Company consent or a right of first refusal may apply. The buyer should also know which reporting, voting, pro-rata, and tag-along rights survive the transfer.
Primary and Secondary Capital Serve Different Purposes
Primary shares bring new money into the business. Secondary shares move existing ownership to a new holder, leaving company cash unchanged in a pure secondary.
A company raising $20 million at an $80 million pre-money valuation has a $100 million post-money valuation. The new investors collectively own 20% immediately after closing, before options or later dilution.
A $10 million purchase from an existing shareholder transfers ownership but contributes $0 to the company's balance sheet. That distinction matters when assessing runway and future financing risk.
A secondary price is often compared with the latest primary financing. When the secondary buyer receives common shares and the primary investors bought preferred, the comparison mixes two different economic claims. The buyer must first adjust for those rights; a quoted discount to the last funding round is not meaningful until the securities are made comparable.
Understand Seller Motivation
Recent tender data shows how seller participation has changed. Across Carta tenders, median seller participation rose from 36.6% in Q1 2021 to 56% in the first half of 2025, while median subscription rose from 73.8% to 99.9%.
Organized tenders can attract more sellers as the private market matures. A higher seller count does not, by itself, signal deterioration at every company. Employees may want to diversify, while an older fund may need to return capital.
The buyer should still ask why this holder is selling now. Concern about financing or exit timing is possible, especially when insiders with better information are reducing exposure on terms the buyer cannot match.
How a Secondary Reaches Closing
Buyer and seller may agree on price before the company has approved the transfer. The transaction closes only after the governing documents and issuer process allow ownership to move.
- Confirm ownership and security: Verify the seller's title, share class, and any liens or encumbrances.
- Review transfer restrictions: Check company consent, rights of first refusal, investor eligibility, and other approval requirements.
- Complete documents and settlement: Execute the purchase agreement, satisfy conditions, transfer funds, and update the cap table or SPV register.
A direct secondary places the company security in the buyer's name. An SPV purchase leaves the vehicle between the buyer and the company, so the vehicle agreement determines fees and decision rights.
Evaluate Company Quality
A familiar, late-stage company still requires a fresh business review. Begin with the customer problem and ask whether the product wins for a durable reason.
Revenue growth becomes more useful when retention and gross margin support it. Customer concentration shows how much of that progress depends on a few relationships.
Cash runway then connects operating performance to the next financing. A company that needs capital soon may force the buyer to absorb dilution before any liquidity event.
Rebuild the Price From the Security Up
The label “secondary” can create an expectation of a bargain, but recent tender data gives the buyer a reason to resist it. In first-half 2025 Carta tenders, both the median and 25th-percentile discount were 0%, while the 75th percentile reached 15%. The buyer must therefore rebuild the valuation from current company evidence and the rights attached to the offered security.
Public-market compression may reduce the relevant reference multiple. An older preferred round may also carry protections the buyer will not receive.
The price still has to allow for the expected holding period and future dilution. A 15% discount to an inflated reference price can leave the buyer paying too much.
Information Access Matters
A formal tender offer generally remains open for 20 business days. The timetable keeps the process moving while the buyer reviews the current financials, cap table, and offered security.
The information package may be incomplete even within a formal process, and secondary buyers often receive less than investors in a new financing. The position size should therefore reflect the confidence that the available evidence can support.
A lower price may compensate for uncertainty within a security the buyer can verify. If the cap table is missing or the security itself cannot be confirmed, declining the transaction becomes a rational valuation decision.
Model Liquidity Timing
An excellent company may stay private for years after the purchase. The base case should therefore use a realistic route to liquidity under current conditions.
The upside can bring the exit forward. The downside should include another financing and a later sale at a lower value. If an IPO is assumed, include the lockup before treating the listing as cash.
Governance and Conflicts
A sponsor may earn economics for arranging the deal and may also have a relationship with the seller. Those incentives should be visible before the LP relies on the sponsor's recommendation.
Trace how the shares were sourced and who must consent to the transfer. Then compare the sponsor's own participation with the terms offered to the buyer.
When a Secondary Can Fit
A secondary fits when the investor can explain the business, value the security, and tolerate the holding period. The available evidence should support the intended position size.
The transaction then has to fit the broader portfolio, including existing indirect exposure to the same company. Familiarity with the company may help the review begin, but the security and portfolio analysis still determine the decision. The secondary sale evaluation memo template records the price, rights, consent path, information limits, and liquidity case in one committee-ready review.
Stripe: Company-Organised Liquidity Without an IPO
Stripe signed a February 2024 tender offer at a $65 billion valuation to provide liquidity to current and former employees. Investors funded most of the purchase, while Stripe also used company capital to repurchase shares.
The transaction established a company-approved reference price for a defined liquidity window.
Demand came from both outside investors and Stripe itself.
That combination gave shareholders liquidity without requiring Stripe to complete a public listing.
A tender can improve transfer certainty and price discovery. Buyers still need the tender documents and eligible-seller rules. They must also review the share class and information package, followed by the allocation and settlement terms.
Primary sources: Stripe, employee liquidity tender (2024). The Stripe tender is cited from public records and is not presented as a Frontierspace result.
Frequently Asked Questions
How should an investor assess a secondary discount?
Compare the price with the correct share class and model the full capital structure. A discount to the latest preferred round may not be attractive if the purchased security has weaker rights.
What can delay liquidity in a private-company secondary?
Company consent and rights of first refusal can delay a transfer. Buyer eligibility rules may narrow the market further. Limited information and a later company exit can extend the holding period again.