No. 46: The Rise of the Secondary Trading of Private Company Shares in the United States, Europe, and the United Kingdom: New Opportunities and Unique Challenges


Publish Date:
November 4, 2019
Publication Title:
TTLF Working Papers
Stanford Law School
Working Paper
  • Diana Milanesi, The Rise of the Secondary Trading of Private Company Shares in the United States, Europe, and the United Kingdom: New Opportunities and Unique Challenges, TTLF Working Papers No. 46, Stanford-Vienna Transatlantic Technology Law Forum (2019).
Related Organization(s):


Despite a large number of venture-backed companies going public in the United States, Europe and the United Kingdom in the first half of 2019, companies of various sizes and valuations continue to see the value in remaining private. As the number of private companies grows, so does the amount of investment capital looking to enter the private market. With record-high amounts of capital contributing to an increased number of high-valued private companies, the demand for liquidity solutions has being building up. Moreover, as the length of time that companies take to go public has increased, many companies are going through their main growth period while remaining private, thus increasing the demand for secondary investment opportunities. As a result of these trends, secondary transactions involving shares of private companies have grown significantly in the United States, Europe and the United Kingdom in recent years.

Secondary sales of private company shares introduce a unique set of challenges, including identifying the right investors, understanding the potential risks, and properly handling the transactions from a legal, accounting and tax perspective on both a personal and a company level. Yet, many of these challenges can be alleviated by the company carefully structuring the terms and conditions of the offering. With the right level of preparation, a well-crafted, company-facilitated secondary offering can help private companies satisfy the liquidity needs of a number of shareholders, while minimizing the risks involved in the transactions. Hence, more and more private companies now recognize the long-term benefits of structuring, managing and prioritizing liquidity strategies for their founders, early-stage investors and employees. As the volume, value and frequency of secondary transactions have increased, the secondary market activity has gradually progressed to a more mature phase. Until a few years ago, private tender offers were generally conducted as a precursor to an initial public offering (“IPO”) to achieve a reference price in the market or as a one-off transaction in which founders, early-stage investors and/or employees would cash out before the company exits. These secondary transactions would also allow a company to pave the way for a successful IPO, giving shareholders an opportunity to sell (part of) their shares without impacting the share price by selling on the public market after expiration of the lockout period. Although these techniques are still commonly used in preparation of an IPO or a direct listing, private companies have progressively broadened their use of private tender offers and have increasingly launched liquidity programs for strategic purposes. For instance, many private companies now consider recurring secondary transactions as an integral component of their incentive compensation programs and provide recurrent liquidity as means to recruit, retain and better incentivize employees. In addition, more and more private companies utilize private tender offers and liquidity programs to accomplish several other goals, including to consolidate or “clean-up” their cap-table, to optimize their governance structure, to locate and to add new strategic investors.

As secondary transactions have evolved, so too have the market participants that support them. For example, an increasing number of U.S., European and UK venture capital firms have raised liquidity (or secondary) funds over the last few years, which focus on providing tailored liquidity solutions to early shareholders – be they current and former founders or employees, angel investors or early stage venture firms – in high-growth private companies. Notable examples include Founders Circle Capital, 137 Ventures, Saints Capital, Delta-V Capital, Akkadian Ventures, Industry Ventures, Oceanic Partners, Balderton Capital, Vitruvian Partners and Hambro Perks.

More recently new private markets have also emerged in the United States, Europe and the United Kingdom to facilitate controlled, liquid and transparent secondary transactions in private company shares. Various players have established different platforms and continue to innovate to meet growing demand and diversified customer needs. Examples include Nasdaq Private Market, Forge Global, EquityZen, SharesPost and Carta.

Liquidity funds and secondary markets for private company shares are positioned to experience significant growth in the United States, Europe and the United Kingdom over the coming years. They have created new models for how investors and other shareholders can unlock their value in private companies. In so doing, they have been changing the landscape of private companies financing and liquidity and have been redefining business ownership in private companies as we know it. Distinctions between public and private markets have been gradually diminishing and liquidity has been progressively shifting towards private capital. Moreover, while robust, transparent and liquid private secondary markets have benefits of their own, they also promote the health of the primary offering markets, which directly benefits emerging and growing private companies. For these reasons, encouraging continued innovation and supporting further development of liquidity funds and secondary markets for private company shares have become incredibly important for secondary buyers and sellers, as well as private companies in which shares are being sold through secondary transactions.