Private company liquidity: A guide to secondary transactions

Secondary transactions then and now

The market for private company equity sales, also known as the secondary market, is a way for executives and other employees of private companies to liquidate stock in order to gain access to cash in the near term.

The secondary market began a 5-year growth surge starting in 2017. It became increasingly institutionalized, with dedicated investors executing deals that helped founders and executives at high-growth, venture-backed companies gain partial liquidity.

Later, following the initial slowdown during the pandemic’s early days, both the public and private markets exploded with activity fueled by an abundance of global government-sponsored liquidity. Some companies rushed to the IPO market to access liquidity at favorable valuations, while many others opted to leverage favorable private market valuations, allowing growth without the scrutiny of public company status. This unique combination of public and private market strength created a perfect recipe for increased secondary market transactions, recording peak issuance in 2021.

Market conditions have fluctuated in 2022, experiencing a sharp pull back due to investor concerns about inflation, rising interest rates, continued COVID-19 challenges and ongoing geopolitical conflict. The appetite for secondary transactions however rose 95% in the first quarter compared to the same period a year earlier. 

It’s unclear how market volatility will impact the secondary market’s issuance, but it is important to note that many of the forces driving its previous growth remain in place. 

Private Company Liquidity

Creating a win-win path to liquidity in the secondary market

Liquidity opportunities in a market this sophisticated require significant due diligence and have impacts across your organization. Take a look at the most important elements to consider on your path to equity.

Valuation considerations

  • Price per share
  • Price related to the last and next round of institutional financing
  • The effect of an above-valuation share price on compliance with Section 409A
  • Potential impacts to future valuations and fair value estimations
  • Impact on exercise price of future stock options
Valuation considerations

Accounting considerations

  • Role of the company in the transaction (purchaser, facilitator, no involvement)
  • Whether the sale should be counted as a compensation expense for the company
  • Risk of tainting existing share-based payment plans
  • Disclosure requirements for a future IPO
Accounting considerations

Tax considerations

  • Implications for employees holding stock
  • Implications for sellers holding stock options
  • Other reporting and foreign shareholder considerations
Tax considerations

Regulatory considerations

  • Potential legal exemptions to the Securities and Exchange Act
  • Whether a tender offer has been triggered under the securities laws
  • Legal disclosures on a Form S-1
  • Blackout periods for secondary sales
Regulatory considerations

Legal considerations

  • Statutory balance sheet tests limiting the amount of capital a company can use to buy its own shares
  • Hart-Scott-Rodino antitrust filing
  • Right of first refusal and right of co-sale restrictions
Legal considerations

HR considerations

  • Threshold levels of sales, both minimum and maximum
  • Potential implications for recruiting and retention
  • Maintaining a culture of equality and enhancing employee morale
HR considerations

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Mike Bellin

Mike Bellin

Partner, Consulting Solutions, IPO Services Leader, PwC US

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