How venture secondaries work: who sells and why, what makes a good secondary target, how deals are priced and how long they take.
Secondaries are one of the least understood corners of venture capital. In this Scout Academy session, Flashpoint's Direct Secondary team walked our scouts through how secondary deals work, who sells, why companies should care, and what makes a good opportunity.
Here's what we covered, written up for anyone curious about private-market liquidity.
A secondary transaction is when an investor buys existing shares from current shareholders instead of buying newly issued shares from the company. The money goes to the seller, not onto the company's balance sheet.
Sellers can be founders, current or former employees, angel investors, early-stage VCs or other institutional shareholders. The company itself usually stays the same: same cap table size, same runway, just a different name next to some of the shares.
A good secondary target is a scale-up, not a startup. The product works, customers pay, the go-to-market is repeatable and the big entrepreneurial risk is mostly behind the company.
That usually means Series B or later, with meaningful revenue (typically tens of millions) and a growth story that still has years to run. A company that has raised a lot of money but still depends on a technical or commercial breakthrough is usually too early.
We also like clear niche leaders: companies that picked a specific vertical and are obviously winning it.
We look at the balance between the two, using something close to the Rule of 40: revenue growth rate plus profit (EBITDA or free cash flow) margin. Fast growth can make up for thin margins, and strong margins can make up for slower growth.
A company growing 40 to 50% a year while sitting around breakeven, with strong unit economics, is a very attractive profile. A mature business with flat growth is much less interesting, even if revenue is large.
Less than an early-stage fund. At this stage you can judge a business by its actual economics, so B2B, B2C, marketplaces, software and even hardware can all work if the numbers do.
The hard cases are businesses where value depends on a binary event, like a pre-revenue biotech waiting on trial results. Some sectors also become hard simply because of price: if a company with modest revenue already trades at a huge valuation, the return math stops working.
Our sweet spot is sub-unicorn companies, roughly in the low-to-mid hundreds of millions in valuation. The idea is to come in before a company becomes a unicorn and benefit as it gets there over a three to five year hold.
Larger companies aren't ruled out, but at that size a small minority shareholder often struggles to get enough information, which leads to the next point.
A secondary investor still needs to underwrite the company, so access to information is one of the main filters. That means basic financials, revenue history, growth, cohorts, unit economics and burn.
Brand names and broker teasers aren't enough. In most cases the company has to cooperate, both before the deal for diligence and after it for ongoing reporting. A former employee holding shares with no company support and no information rights is often hard to transact with.
Founders often have nearly all their wealth tied up in one private company. Selling a small slice, say 5 to 10% of their stake, can take real personal financial pressure off while keeping them heavily invested in the outcome.
Done right, this improves alignment. A founder who can buy a home or pay down debt is less tempted to push for an early exit and more comfortable taking the long-term risks that build a bigger company.
Employees want to turn years of equity into something real. In some countries, exercising options also triggers a tax bill, and a secondary sale can fund the exercise and the tax while the employee keeps part of their stake.
Early-stage VCs and angels sell for portfolio reasons: returning cash (DPI) to their own investors, reducing concentration, or because their fund is reaching the end of its life.
As companies grow, their cap tables fill up with angels, ex-employees, early funds and shareholders from acquisitions. Many of them eventually want liquidity, and if nobody manages that, shares get shopped around and management fields endless information requests.
A reliable secondary partner solves this. It does diligence once, builds an ongoing relationship with the company, and can absorb future secondary supply in an orderly way, including employee tenders and cap table clean-ups after M&A.
When information is ready, getting from first data to a term sheet can take around two weeks. Legal and confirmatory diligence and documentation often take another couple of weeks after that.
Existing investors frequently have a right of first refusal (ROFR), so a buyer usually waits for that process to finish before spending heavily on legal work. Diligence after the term sheet is mostly a red-flag check, since a secondary buyer can't usually ask the company to change how it operates.
Yes. Common shares, preferred shares, converted options and convertibles all carry different economics, so they price differently.
The liquidation preference stack matters a lot. Buying common in a company that has raised a large amount of preferred capital is very different from buying common in a company with a small preference stack, even at the same headline valuation.
Secondary investing is patient. There's rarely only one entry window: a company that is too small, too expensive or missing a seller today can become actionable a year or two later.
In primary VC, missing a round often means missing the company. In secondaries, the same company can come back around several times as it grows, valuations move and new sellers appear.
The best secondary lead combines three things: a proven, fast-growing company, access to its management or information, and a shareholder with a real reason to sell.
Finding a good company is only part of it. Knowing the founder or CFO, or knowing an early investor or ex-employee who wants liquidity, is what turns an interesting name into a deal.
No. In a secondary, the buyer pays the selling shareholder directly. The company's cash position doesn't change unless the deal also includes a primary component.
Not usually. Selling a small part of a stake can reduce personal financial pressure and make a founder more willing to build for the long term. A large sell-down is a different story.
A ROFR lets existing investors, or sometimes the company, match an offer for shares before they go to an outside buyer. Secondary buyers usually wait for the ROFR period to end before doing full legal work.
Some specialist funds do, but many secondary investors, Flashpoint included, look for healthy, growing companies. Sellers selling cheaply because the business is in trouble is a different market.
Recent rounds usually price preferred shares, which come with liquidation preferences. Common shares sit behind those preferences, so they're worth less, especially when a lot of preferred capital has been raised.
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