In 2024, we are witnessing a positive uptick in secondary markets, with potential for further expansion, especially if the Reddit IPO proves successful later this month. This trend is fueled by a high demand for liquidity among private company employees.
In this article, we explore the intricacies of secondary markets, providing valuable insights for those looking to sell their shares in private companies.
Understanding Market Dynamics
Understanding the dynamics of secondary markets is crucial. Unlike public markets, where shares are traded electronically, secondary transactions in private markets are manual and time-consuming. The sale may also be blocked by the company’s board if the company’s stated or in-practice policy is not to allow independent secondary share sales.
In 2021 Robyn helped an AI based unicorn employee exercise his options after leaving the company. In 2023, he decided it’s time to sell his shares and not wait for an IPO. He signed an SPA (Share Purchase Agreement) with a reputable secondary fund for a price reflecting the company’s previous round valuation. Though the price should have been acceptable, and though ROFR (Right of First Refusal) was not activated – the company did not allow the process to finalize and the former employee could not sell his shares.
An active secondary market may be absent in many private companies due to restrictions or a lack of buyers. However, if a market exists, transactions can occur, and a “market price” can be established based on supply and demand.
Setting the Price
The price-setting process in secondary markets is driven by supply and demand, similar to public markets. However, the process is less standardized in private markets. Sellers set their asking prices, while buyers submit bids. Sellers generally prefer high demand, which can drive prices to an equilibrium where supply matches demand.
In scenarios where there are more sellers than buyers, prices tend to decline as sellers compete to sell their shares. This trend is particularly evident during periods of high liquidity demand.
Achieving the Best Execution
To maximize returns when selling shares in the secondary market, understanding investor preferences is crucial. Institutional investment funds, the primary buyers in these markets, typically seek to purchase shares at the lowest possible price to enhance their returns. They also prefer dealing with a minimal number of sellers to reduce administrative complexities. Understanding these preferences can help sellers tailor their approach to attract buyers and achieve the best execution.
Working with a Broker
Navigating the complexities of the secondary market often requires the expertise of a broker. A reliable broker can provide valuable insights into market conditions and help sellers make informed decisions. Transparency, honesty, and the ability to explain market intricacies are key qualities to look for in a broker.
Conclusion
Secondary markets offer valuable liquidity options for private company employees seeking to sell their shares. Understanding how these markets operate and what investors look for can help sellers navigate the process more effectively. Working with a reputable broker is essential to achieving the best possible outcome in the secondary market.
Secondary Alternative – Robyn Capital
Robyn offers a compelling alternative to traditional secondary market transactions. As an early-stage and growth fund, we specialize in financing the exercise of options for startup employees and facilitating equity liquidation for founders and shareholders. Our unique approach eliminates the risk for employees and stockholders, allowing them to retain ownership of their shares and benefit from future upside potential.
In addition to providing funding solutions for option exercises, we also offer extra funds to ensure that employees maximize their equity benefits. By partnering with Robyn Capital, employees and shareholders can avoid the complexities and uncertainties of the secondary markets and instead secure their equity position with confidence.
If you’re considering selling your shares in a private company, we encourage you to explore the options available through Robyn Capital. Our team is dedicated to helping you navigate the process and achieve the best possible outcome for your equity holdings. Contact us today to learn more about how we can help you maximize your equity benefits.
