Secondary startup: Organizing a liquidity window without undermining the equity story.
According to the founding principles of venture capital, investors and employee shareholders in startups generally reap the rewards of their investments and hard work during a liquidity event (initial public offering, buyout). But when these events become less frequent, the issue of liquidity for shareholders and employees becomes a matter of governance, motivation, and the clarity of the equity story.
After a period of slowdown, the IPO market has been showing signs of a more steady recovery since 2024 (depending on the region and sector), and M&A activity is picking up again in a more selective manner (with a return of megadeals).
Consequently, liquidity is becoming more reliable in the medium term for some startups (IPO/M&A), but it remains cyclical. The secondary market therefore retains its value as a tool for liquidity management and governance, especially when the timing of IPO windows does not align with shareholders’ needs.
Global IPOs & M&A (2023–2025)
Even though liquidity windows (IPOs/M&As) are more open than they have been over the past two years, they remain cyclical, selective, and difficult to “time” from a startup’s perspective. As a result, early investors, early employees (and sometimes former employees) may find themselves holding onto their shares longer than expected due to the lack of a “viable” window (i.e., one with aligned market conditions, valuation, and governance).
In this context, the tension stems not only from a “closed” market but also from a mismatch in time horizons: some shareholders may seek faster liquidity (or value preservation), while the board may prioritize a long-term trajectory (growth, profitability, preparing for an exit under better conditions). Without a clear framework (rules, volumes, eligible groups, governance), this mismatch can create friction and undermine good governance.
In a context where neither M&A nor IPOs currently appear to be the preferred exit strategies, the secondary market is increasingly emerging as a complementary and necessary strategy that companies would be well advised to pursue.
Before considering a secondary market transaction, it is essential to fully understand its unique dynamics.
Unlike a traditional fundraising round, the secondary market is not intended to provide new financing for the company, but rather to allow a new investor to join the equity structure by replacing other shareholders (investors or employees) who will transfer their shares to the new investor.
For the shareholders involved, this provides an opportunity to realize their gains without having to wait for a potential initial public offering (IPO) or acquisition of the company.
Although still viewed negatively within the ecosystem, a well-executed secondary transaction involving the right stakeholders can be a key step for the company’s future.
But to achieve this, we need to debunk the myths surrounding secondary transactions and understand their rules, so that they can be seen as a positive signal by the market.
If the goal is to buy out the majority of your company’s executives and key employees, there is no doubt that this move will send the wrong signal to the market. It’s important to note that this would also be the case for a Series A funding round. This may suggest that the company no longer enjoys the trust and support of its key internal stakeholders, which can raise concerns and skepticism among potential investors.
However, in certain situations, a secondary round can be a sound strategic choice. For example, if you’re looking to replace shareholders who have already contributed everything they could—whether in terms of resources, knowledge, or skills—with new investors who are capable of supporting you as you move forward with your project. In this case, a secondary offering can be a positive signal for your equity story. It demonstrates that the company is able to attract new investors, a sign of positive momentum and encouraging growth prospects.
Similarly, a secondary round can be an excellent way to reward your employees. By offering them liquidity, you give them the opportunity to benefit directly from the company’s success. This approach can have a very positive impact on employee morale and contribute to a motivating and rewarding corporate culture. What’s more, by demonstrating that the company cares about its employees’ financial well-being, this new round of funding will be viewed positively both internally and externally. This can strengthen your reputation as an employer of choice and help you attract and retain talent.
Contrary to popular belief, raising a Series B funding round is more complex than organizing a Series A funding round. Several factors contribute to this complexity:
In short, all these factors combined make secondary financing more difficult to manage than primary financing. However, with proper preparation and a dedicated team, it is entirely possible to successfully navigate this complex process.
In a secondary offering, the shares being sold typically come from investors who participated in earlier funding rounds and are often classified as common stock. It is important to note that these shares are not the same as the preferred shares issued during the most recent funding round. Preferred shares generally have stronger protections and therefore offer a higher level of security to investors. Consequently, it would make sense to apply a discount—or a price reduction—to the shares sold during a secondary round. Furthermore, we are currently in an environment where valuations tend to decline between each round. This reinforces the idea that it is all the more important to consider a price adjustment when selling shares in a secondary offering.
It is important to note that not all parties involved in a secondary offering are necessarily well-informed about the details of the shares and their conversion process, particularly your company’s employees. Indeed, the complexity of this information can sometimes make it difficult to understand. Therefore, it is wiseto adopt a proactive education and communication strategy. For example, organizing an annual information session regarding the terms of sale for BSPCE shares, their exercise price, and other relevant information can be extremely beneficial. The main objective of this approach is to make employee stock ownership as transparent and understandable as possible for all employees. This would help prevent misunderstandings from turning employee stock ownership into a myth, which could prove disappointing for those who lack adequate information.
Generally, a secondary transaction is initiated either by the investment fund holding stakes in the company or by the company itself. In either case, several preliminary steps are essential. First , the timing of the transactionmust be confirmed, taking into account the economic environment and the company’s financial situation. Next, it is important to establish a precise timeline for the transaction in order to organize the various stages effectively and avoid any delays. Furthermore, it is necessaryto identify the shareholders involved in order to verify their identities (KYC). This step ensures the legitimacy of the shareholders and helps prevent potential fraud. All of these preparations are necessary to ensure that the secondary offering proceeds smoothly.
It is strongly recommended to avoid preferential liquidation clauses as much as possible, and more specifically any clause that deviates from the standard 1x participatingclause. Such clauses, when particularly aggressive, can often be a sign that a company is in a precarious situation or facing difficulties. In such a situation, pursuing a secondary transaction is certainly not the best strategy. Indeed, this could add an additional layer of complexity and risk to an already unstable environment. Consequently, when faced with aggressive preferential liquidation clauses, it is best to exercise caution and avoid the secondary market.
As a reminder, preferential liquidation clauses protect investors in the event of the company’s unsatisfactory performance. These clauses allow investors who benefit from them to receive a larger share of the proceeds than they would normally have received through a proportional distribution of capital.
When IPOs and M&A deals are slow to materialize, the secondary market can be a pragmatic strategy for alleviating liquidity pressures.
The next most useful step is often the same: set out the terms in writing (who is selling, how much, and under what conditions), verify the articles of incorporation and shareholders’ agreement, and then organize the execution (KYC/AML-CFT if applicable, documentation, account registration, and registry).
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