Pricing Secondary Shares

Pricing Secondary Shares

July 3, 2023 by investor

Pricing Secondary Shares

In selling secondary shares a price must be set.

Since the shares are in a private firm there’s no market to review for a list price.

Here are some factors to consider in pricing a secondary sale:

Are the shares preferred stock or common stock?

Preferred stock has preferences such as liquidation preference and takes precedence over common stock.

Common stock is the equity type issued to founders and employees.  It typically has no special rights beyond ownership.

Since the stock is not publicly traded it’s considered illiquid. 

The price reflects illiquidity and is often set at a 10% to 50% discount to the last priced round.  

Time to exit for the startup is another key factor.  

Most secondary sales come in the last three years of the startup’s life. 

Finally, the health of the company impacts the price as the stronger the growth rate and metrics the higher the price. 

Preferred stock, shorter time to exit, and a high growth rate will yield a higher secondary share price.

 

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.

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