Challenges in Secondary Sales

There are several obstacles to overcome in completing a secondary sale.

Here are some challenges to consider:

Board approval — In many cases, the company must approve any founder shares being sold. 

Right of First Refusal — companies that have raised funding have Rights of First Refusal on any offers of stock sales.   The company must sign off those rights to allow others to purchase the shares.

Co-Sale Rights — Investors may have Co-sale rights which require any purchasers of the company’s stock to purchase an equal amount from the investors.

Corporate Laws — some states have regulations around the re-sale of the company’s stock.

Transfer restrictions — some companies have restrictions on the transfer of stock and must approve any transfers.

409A valuation issues — the company uses a 409A valuation to set the price for employee stock options.  Any secondary sales of the company’s stock above that 409A price may increase the 409A valuation impacting the price of employee stock options.

Review these issues before pursuing a secondary sale.

 

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