Founder secondary sales

1. The core idea#

A founder secondary is a sale of some of a founder's own shares to an investor or another buyer, with the money going to the founder rather than the company. Deeptech founders are often the people who most need it and least often ask: they may have spent years on a PhD stipend, taken a below-market salary for several more, and by Series B own a stake worth millions on paper with no cash.

Done well, a small secondary reduces personal financial pressure and lets a founder make long-term decisions for the company instead of short-term ones for their family. Done badly, it signals that the founder is cashing out, creates a tax problem, or resets the price of common stock for every employee.

Who this is for: a founder at Series A or later considering selling a portion of their shares, usually alongside a new round.

The norms in short:

• Timing: rare at seed, sometimes at a strong Series A, routine at Series B and later. Size: usually a small share of the founder's holding (often around 5–15%, and rarely more than 20% at any one time) and a small slice of the round.
• Price: at the preferred price or a discount to it; strong rounds can price at or even above the last preferred price.
• Process: board approval, waivers of rights of first refusal and co-sale, and a clear story for the team.
• Purpose: personal financial security, not an exit. Say so explicitly.

Related: 5.10 (ESOP buybacks and liquidity programmes), 5.19 (modelling the cap table), 3.13 (paying founders), 4.06 (shareholder agreement basics), 5.07 (strike price and 409A).

2. What the data says (November 2026)#

Public data on founder secondaries is patchy because most are private transactions inside a financing. The pattern across sources is consistent, though.

AltShare's analysis of 2022–2025 transactions found secondary sales are larger at Series B than at Series A, and that employees typically sell a larger share of their holdings than founders do.

How investors see it#

• At seed and early Series A, most investors see a founder secondary as a sign of reduced commitment. The exception is a founder under real personal financial strain, where a small sale can be seen as reducing risk.
• From Series B onwards, a modest founder secondary is widely accepted. Some new investors use it to increase their ownership without issuing more shares.
• Size is the signal. Selling 5–10% of your holding to pay off a mortgage or student debt reads very differently from selling a third.

Why price is lower than the headline#

The headline valuation is the price of preferred shares, which carry a liquidation preference and other rights. A founder holds common shares. A buyer of common is buying a junior security, so a discount to the preferred price is rational. Buyers also discount for illiquidity. A secondary at or above the preferred price usually means very strong demand, or that the buyer is getting something else (for example, a larger allocation in the primary round).

India#

Founder secondaries are common in Indian growth rounds, but the data is mostly anecdotal. Indian shareholders' agreements typically include a founder lock-in and investor consent rights over founder transfers, so any secondary needs investor waivers. Company-run ESOP buybacks reached about $220 million in Q1 2026 (5.10); founder sales usually happen alongside these or within a primary round.

3. How to do it: running a founder secondary#

Step 1. Decide the amount from your own finances#

Work out what you actually need: clearing debt, a home deposit, two or three years of living costs, a cushion for family. Then express it as a percentage of your holding. If it is more than about 15–20%, consider splitting it across two rounds.

Step 2. Read your documents#

Check your articles or bylaws and shareholders' agreement (4.06) for:

• Right of first refusal (ROFR): the company and often investors can buy the shares first at the same price.
• Co-sale or tag-along rights: investors may be able to sell alongside you, which reduces how many of your shares the buyer takes.
• Founder lock-in or transfer restrictions: common in Indian agreements; may need investor consent.
• Founder vesting: you can normally sell only vested shares, and the buyer will want to know.

Step 3. Find the buyer#

The most common route is to fold the secondary into a new priced round: the lead investor buys some shares from you alongside its primary investment. Other routes are an existing investor increasing its stake, or a specialist secondary fund. Raise it early in the

round discussions, not at signing.

Step 4. Set the price and the instrument#

• Common at a discount to the new preferred price is the default.
• Converting to preferred. Some deals let the founder's sold shares convert into the new preferred series, so the buyer gets the same rights and pays the full price. Companies that issued founder preferred stock at incorporation have this option built in.
• Think about the knock-on effects. A secondary at a price close to the preferred price can be treated as evidence of common-share value in the next 409A (US) or valuation report (India), raising strike prices for new employee grants (5.07). Document why the price differs from common FMV.

Step 5. Get tax advice before you agree the price#

The tax depends on where you live, how long you have held the shares, and whether any part of the price could be treated as pay rather than a sale (section 4). Small changes to structure can change the result by hundreds of thousands.

Step 6. Get the approvals#

Board approval of the transfer, ROFR and co-sale waivers, and any investor consents. Make sure the board minutes record that the sale is a personal liquidity event and not a signal about the company.

Step 7. Tell the team, and think about them too#

Employees will find out. Explain it yourself: the amount relative to your holding, why, and that you are staying. If you can, pair it with an employee liquidity programme now or soon (5.10). A founder who sells while employees cannot is a common source of resentment.

Step 8. Close and update the cap table#

Share purchase agreement, transfer forms, any foreign-exchange filings (section 4), and an updated cap table and share register.

Worked example#

The founders from 5.19 are now raising a Series B. One founder holds 4,500,000 common shares, has been paid below market for six years and still has debts from her PhD years. The Series B is priced at $5.00 per preferred share, and the lead investor agrees to buy $1.5 million of her shares.

Tax on the $1.5 million (illustrative, assuming a near-zero cost base and shares held for more than five years):

The gap between these outcomes is larger than any negotiation over the discount, which is why tax advice comes before the price.

4. Country notes#

India#

• Capital gains. Unlisted shares held for more than 24 months are long-term, taxed at 12.5% plus surcharge (capped at 15% for these gains) and cess. Shorter holdings are taxed at slab rates.
• Sale below fair value. For unlisted shares, if the price is below fair market value, the seller is taxed as if they had received fair value (the old section 50CA rule, carried into the Income-tax Act, 2025), and the buyer can be taxed on the shortfall as income. A secondary at a discount to the preferred price can still be at or above fair value of common; get a valuation report to show it.
• Foreign buyers. A transfer from a resident founder to a non-resident buyer must be at or above fair value under FEMA pricing rules, and is reported to the RBI in Form FCTRS within 60 days (4.19).
• Paperwork. Share transfer form (SH-4), stamp duty on the transfer, board noting of the transfer, and updates to the register of members and beneficial ownership records.
• Buyback instead of sale. If the company buys back shares, the tax treatment changed again from 1 April 2026: proceeds are once more taxed as capital gains rather than as dividends, with an additional tax for promoters, which usually includes founders (5.10, 3.12).

United States#

• Capital gains. Shares held more than a year are taxed at long-term rates (up to 20%) plus the 3.8% net investment income tax for high earners, plus state tax.
• QSBS. If the shares qualify as qualified small business stock (section 1202), gain can be partly or wholly excluded. For stock issued after 4 July 2025, the exclusion is 50%, 75% or 100% after three, four or five years, up to $15 million per issuer (or 10 times basis), and the company's gross assets must have been no more than $75 million when the stock was issued. Older stock follows the earlier rules (five-year holding, $10 million cap). A secondary before the holding period ends loses some or all of the benefit.
• Compensation risk. If the company, or an investor acting with it, pays a founder who is also an employee more than the fair value of common, the excess may be treated as compensation (ordinary income and payroll tax), and it can affect the company's 409A valuation and accounting. Structures that convert the sold shares into preferred, or price clearly at common value, reduce this risk. Ask counsel.
• ROFR and transfer restrictions in the bylaws and investor agreements are standard; plan time for waivers.

United Kingdom#

• Capital gains tax. 18% for basic-rate and 24% for higher-rate taxpayers since 30 October 2024.
• Business Asset Disposal Relief. 18% from 6 April 2026 (14% in 2025–26) on up to £1 million of lifetime gains, if the founder has held at least 5% of the shares and votes and been an officer or employee for two years before the sale, among other conditions.
• Employment-related securities. Founder shares acquired because of employment are "employment-related securities". If they are sold for more than market value, the excess can be taxed as employment income under the Chapter 3D rules. Price the sale at or below market value of the shares sold, or get advice.
• Investors' Rights. UK articles usually contain pre-emption on transfer and drag/tag provisions; check them and get the required consents.

5. Scripts, mistakes and sources#

Scripts#

Raising it with a lead investor

"Alongside the primary, I'd like to sell a small amount of secondary: about $1.5 million, which is under 8% of my shares. I've been on a below-market salary for six years and this takes personal financial pressure off so I can stay focused for the next five. I'm not selling anything beyond that, and I'll keep the rest locked in on the same terms."

Telling the board

"I'd like the minutes to record that this is a personal liquidity sale, sized at under 8% of my holding, with ROFR and co-sale waived. I'd also like us to commit to an employee tender within 12 months so the team gets a chance too."

Telling the team

"As part of the Series B, I sold a small part of my shares, under a tenth of what I own. I did it so I'm not making company decisions with money worries in the background. I'm not going anywhere. We're also planning a programme for employees to sell some of their vested shares in the next year."

Declining a buyer who wants a bigger slice

"I appreciate the interest, but I'm not going to sell more than this. What I'm happy to do is make sure you get a larger allocation in the primary round."

Common mistakes#

1. Selling too much, too early. A large sale at seed or early Series A reads as an exit.
2. Agreeing a price before tax advice. Structure and timing often matter more than the discount.
3. Selling QSBS stock before the holding period. In the US this can cost the whole exclusion on the shares sold.
4. Forgetting the 409A or valuation knock-on. A high secondary price can raise strike prices for every future grant.
5. Ignoring ROFR, co-sale and lock-in terms. These take time to waive and can shrink the deal.
6. Selling while employees cannot. Pair a founder secondary with an employee liquidity plan when you can.
7. Selling below fair value in India without a valuation, which can create tax for both seller and buyer.

Related playbooks#

• 5.10 ESOP buybacks and liquidity programmes
• 5.19 Modelling the cap table across rounds
• 5.07 Setting the strike price: US 409A and Indian valuations
• 5.08 ESOP tax: Indian perquisite tax, DPIIT deferral; US ISO and AMT
• 3.12 Co-founder breakups: buybacks and good/bad leaver terms
• 3.13 Paying founders before and after funding
• 4.06 Shareholder agreement basics
• 4.19 FEMA, FDI and ODI rules for foreign money

Sources#

• Fenwick, Secondaries, founder liquidity and SAFEs: inside evolving deal terms (Q2 2025)
• Carta, tender-offer updates (H1 2026) and liquidity data (2025–2026)
• AltShare, The state of private funding 2022–2025 (secondary sizes by stage)
• The VC Corner, A founder's guide to the secondary market in 2026
• Equidam, notes on secondaries and 409A (2026)
• Earlier playbooks in this library for India buyback tax (3.12, 5.10), US QSBS and UK BADR rates (5.08)

This playbook is general information, not legal, tax or investment advice. Take personal tax advice in your country of residence before agreeing a secondary sale.