Employees of fast-growing companies may find themselves holding substantial equity positions that remain illiquid until a triggering event like an IPO or sale. This can represent significant potential wealth when it can be converted. However, it can also represent a roadblock to achieving financial goals, including real estate purchases or family planning. At Caprock, we have extensive experience in using secondary market sales as a strategic tool to access liquidity.
In the following article, we will walk you through how these transactions function, the benefits and risks, and why working with an experienced partner like Caprock is critical to integrating them into a comprehensive wealth management plan.
The goal is not simply to “unlock liquidity,” but to understand when and whether doing so makes strategic sense.
Secondary sales can be powerful tools, but only if they align with your broader financial goals, risk posture, and phase of wealth creation.
The Challenge of Illiquid Wealth in High-Growth Companies
Equity compensation is a cornerstone of total compensation for professionals at pre-liquidity companies, like those at the forefront of AI and fintech. These positions can appreciate dramatically and create paper wealth that is often inaccessible in the short term. The challenge is finding a way to convert a portion of equity into cash without derailing long-term upside.
This is where secondary markets can be an opportunity because they allow shareholders to sell shares to accredited investors or institutions before a public offering. In addition, many companies now run company-approved secondary liquidity programs where shareholders can sell with more certainty and less friction.
Either way, it makes sense to work with a wealth management firm that understands how to make secondary market sales part of a broader financial strategy. Whereas many wealth management firms focus on public markets and productized investments, Caprock has experience in creating liquidity events for its clients.
Today’s secondary market is far more developed than it once was, with a growing number of organized platforms, funds, and buyers creating opportunities for both employees and early investors. Liquidity isn’t limited to current employees; many secondary sales involve former employees or early investors whose shares are less restricted by company policy. These participants often have greater flexibility to transact, especially if they’ve left the company.
Caprock also supports clients who are navigating formal, company-approved liquidity events and, when appropriate, helps find opportunities through established platforms.
The decision to sell should start with considering whether you are still in a wealth-creation phase, where maintaining concentration makes sense, or have reached the stage where risk mitigation should take precedence.
Secondary Sales as a Strategic Liquidity Solution
Selling shares on the secondary market can be an effective strategy for individuals with concentrated, illiquid equity in high-growth companies. Secondary transactions provide immediate access to capital, unlike an IPO, which may be undervalued or uncertain.
Secondary sales transform “locked-up” wealth into actionable resources, empowering holders to balance present needs with long-term potential.
Consider an employee who holds Restricted Stock Units (RSUs) – a promise of stock after vesting – or options that have vested but remain private. Secondary sales would allow the liquidation of a portion to fund other investments, pay down debt or support lifestyle goals, all while retaining exposure to the company’s future growth.
There are several platforms that facilitate secondary market trades by connecting sellers with buyers interested in pre-IPO shares. But not all transactions are created equal. Because there is no centralized clearing price, pricing can vary meaningfully between platforms.
At Caprock, we’ve seen sellers move forward with offers at significant discounts to what was available elsewhere. Understanding current valuations and appropriate discounts is critical to avoid leaving money on the table.
How Secondary Market Sales Work
Here’s an overview of how secondary market sales involve the transfer of existing shares from current holders to new buyers. This is different from primary issuances, where companies raise fresh capital.
1. First, eligible shareholders, such as employees or early investors, must confirm their shares are eligible for sale. This can be done by reviewing company bylaws, shareholder agreements, or equity plans for restrictions like lock-up periods or transfer prohibitions. Many individuals overlook key transfer restrictions embedded in their original operating or shareholder agreements, sometimes only discovering limitations late in the process. A thorough legal review up front can prevent costly surprises.
2. Shares are then priced based on recent funding rounds, comparable transactions, or third-party appraisals.
3. Specialized platforms (e.g., Nasdaq Private Market, MicroVentures, or Hiive) can be used to match sellers with accredited investors, venture capital funds, or even the company itself via tender offers. Most private companies will exercise a Right of First Refusal (ROFR), allowing them (or designated parties) to match any offer. Co-sale rights may also apply, enabling other shareholders to participate pro rata.
4. Once approved, the sale is documented via a stock purchase agreement. Funds are transferred, and shares are reassigned, often with legal and tax reviews to ensure compliance.
5. Sellers should consider post-transaction tax events, such as capital gains, and update their estate or financial plans accordingly. One frequently missed opportunity to note: Qualified Small Business Stock (QSBS) eligibility. If shareholders meet the criteria, including a five-year holding period and qualifying company characteristics, they can potentially exclude capital gains up to 100%. However, even seasoned tax professionals sometimes overlook this.
Benefits and Potential Risks of Secondary Market Sales
Like many things, there are benefits and risks to consider when conducting secondary market sales.
Working with an Experienced Advisor
Navigating secondary sales is not a standalone event but a component of holistic wealth management. Engaging an experienced advisor ensures that liquidity decisions support broader goals, such as tax optimization, risk mitigation, and legacy planning.
Caprock’s experience is both practical and philosophical: We’ve invested directly in private companies and the platforms that create secondary liquidity. We understand how these markets function from the inside. Our role is to help clients decide whether a sale makes sense. We start with a question few others ask: Are you still in wealth-creation mode? If so, concentration may be appropriate. Only when risk mitigation becomes the priority do we start to think about selling.
Secondary sales should never be a reflex. They should be part of an intentional, disciplined approach to wealth management that balances opportunity with prudence. We synthesize your entire balance sheet—public, private, and impact investments—into a unified strategy, ensuring secondary sales fit seamlessly. Drawing on diverse expertise, we evaluate risks, negotiate terms, and coordinate with legal/tax professionals to maximize outcomes.
Secondary sales represent a powerful tool for unlocking the value in illiquid equity, but success hinges on informed execution. At Caprock, we invite you to explore how we can tailor a liquidity strategy to your unique situation.
Schedule a confidential consultation and discover how we can help you navigate this path with confidence
Frequently Asked Questions (FAQ)
1. How do I sell my startup equity before an IPO?
You can sell existing company shares through the secondary market by finding a new buyer—often an accredited investor or institution—and completing a private transaction. Many companies now offer company-approved liquidity programs that streamline this process. It’s important to review your shareholder agreements and confirm any transfer restrictions before proceeding.
2. What is a secondary market sale?
A secondary market sale involves selling existing shares of a private company to a third party. Unlike a primary issuance, no new shares are created—ownership simply transfers from one party to another. These transactions can provide liquidity to the original shareholder before a public offering or acquisition.
3. What are the tax implications of selling private company shares?
Selling shares may trigger capital gains taxes, depending on how long you’ve held the equity and your cost basis. If your shares qualify as Qualified Small Business Stock (QSBS), you may be eligible for significant tax exclusions. Always consult an experienced advisor before transacting.
4. How do I know if my shares are eligible for sale?
Eligibility depends on your company’s bylaws, shareholder agreements, and any lock-up or transfer restrictions. It’s essential to conduct a legal review and gather advice from a seasoned advisor to avoid surprises.
5. What are the risks of selling my equity early?
Key risks include selling at a discount, triggering taxes, and missing future upside if the company’s valuation increases. Market volatility and company restrictions can also impact timing and pricing. Align your approach with your financial goals and seek outside consultation to fully evaluate the considerations and risks.
©Caprock. All rights reserved. The Caprock Group, LLC (“Caprock”) is an SEC Registered Investment Advisor. This communication is not an offer or solicitation with respect to the purchase or sale of any security and is for informational purposes only. Information contained herein has been derived from sources believed to be reliable, but Caprock makes no representations as to its accuracy or completeness. Investment in securities involves the risk of loss. Past performance is no guarantee of future returns. Registration with the SEC does not imply a certain level of skill or training. Caprock, its Employees, Affiliates and Advisers are not tax or legal professionals and do not provide such advice. Therefore, the discussions contained herein are for informational purposes only and should not be construed as a recommendation or endorsement of a strategy. Please consult with your tax or legal professional for further guidance and information. Caprock invests client capital through a variety of structures, including blended vehicles and direct investments.
