A secondary transaction is any sale of securities between investors rather than a sale from the company that originally issued them. When you buy stock on the New York Stock Exchange, that’s a secondary transaction. When an early employee at a private startup sells shares to another investor, that’s also a secondary transaction. The defining feature is that the money flows from one investor to another, not into the company’s bank account.
Primary vs. Secondary: Where the Money Goes
In a primary market transaction, a company issues new shares and sells them to investors to raise capital. An initial public offering (IPO) is the classic example: the company creates shares, sells them to the public for the first time, and uses the proceeds to fund operations, pay down debt, or expand. The company’s equity capital comes from these primary sales.
Once those shares exist and are in investors’ hands, every subsequent trade between investors is a secondary transaction. If you buy 100 shares of Apple through your brokerage, Apple doesn’t receive a penny from that purchase. You’re buying from another investor who decided to sell. The same logic applies in private markets: if an early-stage investor in a startup sells their stake to a new buyer, the startup doesn’t get any of the proceeds.
How Secondary Transactions Work in Public Markets
In public markets, secondary transactions are straightforward. Shares trade on exchanges with transparent pricing, and you can buy or sell in seconds through a brokerage account. Prices are set by supply and demand in real time, and there are generally no restrictions on who can buy or sell. This is the version of secondary trading most people encounter without even thinking about the term.
How They Work in Private Markets
Private company secondary transactions are more complex and have become increasingly important as companies stay private longer. There are several common structures.
Tender Offers
A tender offer is a company-sponsored event where the company or a third-party investor offers to buy shares from a broad group of eligible shareholders at a set price. The offer must remain open for at least 20 business days. The company controls which buyers and sellers can participate and sets the price, making tender offers the most organized way to provide liquidity at scale. Large private companies often use tender offers to let employees cash out a portion of their equity without going public.
Direct Secondary Sales
A direct secondary sale (sometimes called a bilateral trade) happens when one investor sells shares to another in a deal that isn’t organized by the company. These are negotiated one-on-one, and the two parties agree on price and terms privately. Even though the company isn’t running the deal, most private companies require approval before the sale can close, giving them a say over who ends up on their cap table.
Special Purpose Vehicles
Sometimes a buyer will create a special purpose vehicle (SPV) to pool capital from multiple smaller investors and purchase shares in a single block. This lets investors who might not have enough capital individually to meet minimum transaction sizes gain exposure to a private company. From the seller’s perspective, they’re selling to one entity rather than negotiating with a dozen different buyers.
Transfer Restrictions That Can Block a Sale
Private company shares almost always come with contractual restrictions that make secondary sales harder than selling public stock. Understanding these is critical if you’re thinking about selling private shares.
The most common restriction is a right of first refusal (ROFR). If you receive an offer to buy your shares, you typically must present that offer to the company or existing shareholders first, giving them the chance to buy the shares on the same terms. Only if they decline can you proceed with the outside buyer. The notice period and mechanics vary by agreement, but ROFR provisions are standard in shareholder agreements.
Other common restrictions include tag-along rights, which let minority shareholders sell alongside a larger seller on the same terms, and drag-along rights, which let majority shareholders force minority holders to join a sale. Many agreements also require outright board or company consent before any transfer happens. These provisions exist to control who becomes a shareholder and prevent unwanted outsiders from buying their way onto the cap table.
Tax Treatment for Sellers
The tax consequences of a private secondary sale depend heavily on the circumstances, and the difference can be significant. If the sale qualifies as a standard capital transaction, you may owe long-term capital gains tax on any profit, which carries preferential rates. But if the IRS determines the sale was really a form of compensation for services, the gain gets taxed as ordinary income, potentially at much higher rates, and may also trigger payroll taxes.
Several factors influence which treatment applies. When the sale price is well above the company’s fair market value as determined under Section 409A (the IRS provision governing how private companies value their stock for compensation purposes), the IRS may question whether the premium was actually disguised pay. Sales limited exclusively to current or former employees face more scrutiny than transactions that include outside, non-employee shareholders. If the company itself is the buyer, negotiates the price, or coordinates the deal, that also tilts toward compensatory treatment. Recurring secondary sales tied to employment milestones, like annual liquidity windows, are more likely to be classified as compensation programs.
The clearest path to capital gains treatment is a sale that looks like a genuine investment transaction: it involves outside parties, is negotiated at arm’s length, isn’t tied to your employment status, and isn’t facilitated or directed by the company.
Why Private Secondaries Are Growing
The private secondary market has exploded in recent years. Global secondary transaction volume hit a record $226 billion in 2025, up 41% from the prior year, according to J.P. Morgan. The driving force is simple: companies are staying private much longer, and the traditional exit routes of IPOs and acquisitions have slowed considerably. An estimated 30,000 portfolio companies worldwide are currently awaiting an exit, representing roughly $3.7 trillion in unrealized value.
This backlog has turned secondaries into an essential liquidity tool. Employees who hold equity in private companies that may not go public for years need a way to convert some of that paper wealth into cash. Early investors in venture and private equity funds need to return capital to their own investors. And new buyers see opportunity in purchasing stakes at prices that may reflect a discount to the last funding round, though a discount to the most recent valuation doesn’t necessarily mean the company is cheap. Private market pricing relies on historical data that can lag real conditions, and the lack of public financial disclosures makes accurate valuation harder.
For anyone holding private company shares, whether as an employee, founder, or investor, secondary transactions offer a path to liquidity that didn’t exist at this scale a decade ago. The tradeoffs are real: transfer restrictions, company approval requirements, potential tax complexity, and less transparent pricing compared to public markets. But as companies continue to delay going public, secondaries are increasingly how private market participants turn equity into cash.