A secondary sale can return cash before a company exits, typically below the latest valuation. When a company winds down, creditors and preferences are paid first, and common holders commonly receive nothing.
11 min read · Level 5
I think secondary sales deserve less stigma and wind-downs more realism. Taking a discount to turn an uncertain, illiquid stake into cash can be entirely sensible, especially when the money has a better use. And accepting that common holders usually receive nothing in a failure is the most important assumption to make before investing, not after.
Secondary sales. An investor can sometimes sell private shares to another investor before a company exits. Common features:
Discount buyers usually pay less than the latest round price Consent the company may have approval or first refusal rights Share class common shares often sell at a larger discount than preferred Buyers specialist secondary funds, other investors, sometimes the company
A stake marked at 400,000 based on the last round, sold at a 30% discount:
400,000 x (1 - 30%) = 280,000
The seller gains certainty and time; the buyer is paid for the risk and illiquidity they take on.
Wind-downs. When a company shuts down, remaining assets are sold and proceeds are distributed in order:
1 Creditors, including employees' legally protected pay where applicable 2 Preferred shareholders, up to their preferences 3 Common shareholders
A company raises 1,500,000 from selling its assets, owes 1,000,000 to creditors, and has 10,000,000 of preferences:
Creditors receive 1,000,000 Preferred receive 500,000 Common receive 0
Because secondaries are the main way individual investors can create liquidity before an exit, and understanding the discount helps judge whether selling is worth it.
Wind-downs matter because they are common. For an angel holding common shares, the realistic outcome of a failure is usually zero, which should shape position sizing from the start.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Weighing a secondary. An angel's stake is marked at 400,000. A buyer offers 280,000.
Option Outcome Sell now 280,000 certain Hold, company sells well later perhaps 600,000 in several years Hold, company struggles perhaps 0
If the angel estimated a 50% chance of 600,000 and a 50% chance of zero, holding has an expected value of 300,000, but with much wider uncertainty and years of waiting. The angel had a near-term need for cash and chose to sell half the stake, receiving 140,000 and keeping exposure to the upside.
Treating a secondary offer below the last round price as a bad deal by default, or assuming common shareholders will recover something in a wind-down.
Read whether the company must approve a sale and whether it or others have rights of first refusal.
Estimate outcomes and rough probabilities for holding, and compare with certain cash now.
Partial sales can meet a cash need while keeping some upside.
Estimate what creditors and preferences would absorb if the company closed.
When considering selling private shares early, or when a portfolio company may shut down.
Do not apply the illustrative discount or probabilities to your own position. Secondary pricing depends on the company, share class and market conditions.
Reports from secondary market advisers and industry data providers have documented substantial growth in secondary transactions for private company shares and fund interests over the past decade, with discounts to last round prices widening significantly during 2022 and 2023 as private valuations fell.
Secondary liquidity exists, but its price reflects market conditions and can be much lower than the last round in weak markets.
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