Founders may choose to sell secondaries for a variety of reasons. Some common motivations behind this decision are listed here:
Liquidity: Startup founders typically face a liquidity constraint, especially if their wealth is predominantly tied to their company’s shares. Selling secondaries provides an opportunity to access cash without necessarily having to sell their entire stake in the company. This liquidity can be valuable for personal expenses, such as buying a house, supporting family members, or funding other ventures.
Early financial reward: Founders often invest substantial time, effort, and capital into building their companies. However, the path to significant financial returns can be long and uncertain, as startups typically require years of growth and potentially multiple funding rounds. Selling secondaries allows founders to realize some of the value they have created before an exit event, providing them with a tangible reward for their hard work and reducing their financial dependence on future outcomes.
Diversification: Founders often have a significant portion of their personal wealth tied up in their company’s equity. Selling secondaries allows them to diversify their investment portfolio and reduce their exposure to a single asset. By converting some of their illiquid equity into cash, they can allocate funds to other investments or financial goals, mitigating risk and increasing financial security.
Employee incentives: Many startups offer equity-based compensation to employees to attract and retain top talent. By selling secondaries, founders can provide liquidity options to their employees, allowing them to cash out a portion of their vested equity. This can serve as a powerful incentive, fostering employee loyalty, and providing a financial reward that aligns with the company’s success.
Capital for growth or acquisitions: Founders may choose to sell secondaries to raise capital for various reasons, including funding the company’s growth plans, expanding into new markets, or making strategic acquisitions. By selling a portion of their shares, founders can access immediate capital without diluting their ownership stake or relying solely on external funding sources. This approach enables them to maintain control and make strategic decisions to further accelerate their company’s development.
Investor pressure or opportunity: In some cases, existing investors may seek liquidity by purchasing shares from founders in secondary transactions. This could be driven by their own need for diversification or their confidence in the company’s future prospects. Founders may consider selling secondaries in response to such requests to accommodate the investors or capitalize on an attractive offer, especially if they believe the company’s valuation is strong and the opportunity is favorable.
It’s important to note that every founder’s situation is unique, and their motivations for selling secondaries can vary widely depending on their personal circumstances, financial goals, and the specific dynamics of their company. Selling secondaries does not necessarily mean that the founder is no longer committed to the company. In fact, selling secondaries can provide the founder with additional resources and flexibility to help grow the company over the long term. Ultimately, the decision to sell secondaries depends on the individual circumstances of the founder and the company.
At Nordic Eye, we are currently raising our first Liquidity Fund. A fund seeking to capitalize on and create value for investors from the often very lucrative secondary opportunities, primarily in Europe and the US. Our dedicated team in Copenhagen and London have a significant experience in venture capital and from previous roles in dedicated secondary funds.
The fund will seek to provide liquidity solutions for founders, employees and early investors, specifically in more mature growth tech companies with a more balanced risk profile that traditional venture. The Nordic Eye Liquidity Fund is designed to address the lack of liquidity in the venture capital market, allowing insiders and early investors to de-risk their personal wealth and companies to stay private longer. We are aiming for a first close during summer 2023, and the fund will play an important role in the growth and development of the European venture ecosystem.