Secondary sale

A primary round issues new shares and the proceeds fund the business. A secondary transfers shares that already exist, and the proceeds go to whoever sold them. Rounds increasingly combine both: an investor puts new money in and separately buys some founder or early-employee stock.

Secondary does not dilute, because no new shares are created. It does change the register, which is why companies control it through rights of first refusal and transfer restrictions in the shareholders agreement.

Companies stay private far longer than they used to. Founders and early employees can hold paper worth a great deal for a decade with no way to realise any of it, which distorts decisions, particularly around whether to sell the company.

Letting founders take modest liquidity, commonly 5% to 15% of their holding, removes some of that pressure. Investors generally accept it at Series B and later, and resist it earlier, on the view that founders should stay fully exposed to the outcome while the company is still finding its footing.

Secondary shares usually convert to common when sold, so a buyer purchasing preferred stock in a secondary may not inherit the preference and other rights attached to the original purchase.