Secondary Transaction Framework

SECONDARY FUNDAMENTALS

Secondary Transaction Overview

SECONDARY TRANSACTION FUNDAMENTALS

WHAT IS A SECONDARY:
A secondary transaction allows existing shareholders
to sell their shares to new or existing investors,
providing liquidity without a company exit.

WHY SECONDARIES MATTER:

For Employees:
☐ Partial liquidity before exit
☐ Diversification of wealth
☐ Reduces golden handcuffs
☐ Improves retention (paradoxically)
☐ Life event flexibility

For Founders:
☐ Reduce personal financial pressure
☐ Diversify concentrated risk
☐ Enable longer-term thinking
☐ Align with new stage of company

For Investors:
☐ Portfolio rebalancing
☐ Fund lifecycle management
☐ Return capital to LPs
☐ Validate company value

For Company:
☐ Retention tool
☐ Recruiting advantage
☐ Enables longer private runway
☐ Creates investor optionality

WHEN TO CONSIDER:

Positive Triggers:
☐ Company value significantly increased
☐ Employees have significant vested equity
☐ Strong investor interest in buying
☐ Later stage with proven business model
☐ 3+ years since last primary raise

Caution Signs:
☐ Company struggling (creates bad optics)
☐ Valuation uncertain
☐ Recent/upcoming primary raise
☐ Regulatory or legal complications
☐ Key people selling aggressively

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TRANSACTION TYPES

Secondary Transaction Options

SECONDARY TRANSACTION TYPES

TYPE 1: COMPANY-SPONSORED TENDER OFFER

Description:
Company facilitates structured liquidity program
where shareholders can sell to external buyers.

Mechanics:
☐ Company sets terms and timing
☐ Company finds buyers
☐ Participation is optional
☐ All participants get same price/terms
☐ Company handles administration

Pros:
+ Fair and structured
+ Company controls narrative
+ Broad-based benefit
+ Price discovery controlled
+ Legal framework clear

Cons:
- Complex to administer
- Company bears costs
- Takes management time
- Securities law requirements
- May not meet all demand

Best for:
☐ Broad employee liquidity programs
☐ Retention-focused initiatives
☐ When company wants control of process

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TYPE 2: INVESTOR-LED SECONDARY

Description:
Existing investor(s) purchase shares directly
from shareholders in bilateral transactions.

Mechanics:
☐ Buyer and seller negotiate directly
☐ Company may or may not be involved
☐ ROFR/co-sale rights still apply
☐ Typically larger block transactions
☐ Often tied to primary round

Pros:
+ Less company involvement
+ Lower administrative burden
+ Faster execution
+ Flexible deal terms
+ Can happen alongside primary

Cons:
- May not benefit all shareholders
- Company less control over who buys
- Can create information asymmetry
- May complicate primary negotiations

Best for:
☐ Large shareholder blocks
☐ During primary fundraising
☐ When specific buyer identified

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TYPE 3: FUND RESTRUCTURING/CONTINUATION

Description:
VC fund transfers portfolio company stake to
continuation vehicle, providing LP liquidity.

Mechanics:
☐ GP creates new vehicle
☐ LPs can take cash or roll over
☐ Provides liquidity to LPs wanting exit
☐ Company stake stays with same GP

Pros:
+ Doesn't change shareholder base
+ Provides investor liquidity
+ Can align fund timeline with company
+ No employee participation issues

Cons:
- Complex fund-level transaction
- Company has limited control
- May signal fund pressure
- Can affect investor dynamics

Best for:
☐ When fund approaching end of life
☐ Long-term company timeline
☐ Investor-driven liquidity need

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TYPE 4: EMPLOYEE LIQUIDITY PROGRAMS

Description:
Ongoing or periodic programs specifically
for employee liquidity.

Types:
☐ Periodic tender offers (annual/biannual)
☐ Secondary market access (Carta, Nasdaq Private)
☐ 10b5-1 style planned sales
☐ Company buyback programs

Pros:
+ Retention benefit
+ Recruiting advantage
+ Structured and fair
+ Can become standard practice

Cons:
- Ongoing administration
- Creates pricing expectations
- May accelerate vesting pressure
- Tax and securities complexity

Best for:
☐ Later-stage companies
☐ Long private runway
☐ Competitive talent markets

Transaction Type Decision Matrix

Criteria	Tender Offer	Investor-Led	Fund Restructure	Employee Program
Company control	High	Low	None	High
Employee access	Broad	Limited	None	Broad
Admin burden	High	Low	None	High
Cost to company	High	Low	None	Medium
Complexity	High	Medium	High	Medium
Timeline	60-90 days	30-45 days	90-180 days	Ongoing
Flexibility	Low	High	Low	Medium

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PROGRAM DESIGN

Designing a Secondary Program

SECONDARY PROGRAM DESIGN

ELIGIBILITY CRITERIA:

Tenure Requirements:
☐ Minimum employment: ___ years
☐ Post-vesting cliff: ___ months
☐ Current employee: ☐ Required ☐ Not required
☐ Former employee eligible: ☐ Yes ☐ No

Share Requirements:
☐ Minimum vested shares: _______________
☐ Exercise status: ☐ Exercised only ☐ Options included
☐ Share class: ☐ Common ☐ Preferred ☐ All
☐ Source: ☐ Grants only ☐ Purchases included

Other Criteria:
☐ Good standing required
☐ Performance thresholds (if any)
☐ Executive-specific rules
☐ Founder-specific rules

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PARTICIPATION LIMITS:

Per Participant:
☐ Maximum shares: ___% of holdings
☐ Maximum value: $_______________
☐ Minimum value: $_______________

Program Total:
☐ Total shares available: _______________
☐ Total value available: $_______________
☐ Pro-rata if oversubscribed: ☐ Yes ☐ No

Allocation Priority (if oversubscribed):
1. ☐ Pro-rata
2. ☐ Tenure-based
3. ☐ Smaller holders first
4. ☐ First-time sellers first
5. ☐ Other: _______________

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PRICING:

Pricing Method:
☐ Most recent 409A
☐ Preferred share price equivalent
☐ Third-party valuation
☐ Negotiated with buyers
☐ Discount to above: ____%

Price Considerations:
☐ Single price for all: ☐ Yes ☐ No
☐ Minimum price floor: $_____/share
☐ Board price approval required: ☐ Yes ☐ No

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TIMING:

Window:
☐ Open period: ___ days
☐ Blackout considerations
☐ Fiscal quarter timing
☐ Financing round timing

Frequency:
☐ One-time program
☐ Annual offering
☐ Triggered by events
☐ Ongoing access

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RESTRICTIONS:

Lock-up:
☐ Post-sale lock-up: ___ months
☐ Applies to remaining shares: ☐ Yes ☐ No
☐ Applies to future grants: ☐ Yes ☐ No

Holding Requirements:
☐ Minimum retention: ___% of holdings
☐ Unvested shares excluded
☐ Recent grants excluded

Other:
☐ Non-compete/non-solicit extension
☐ Clawback provisions
☐ Termination implications

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STAKEHOLDER MANAGEMENT

Stakeholder Communication Framework

STAKEHOLDER COMMUNICATION PLAN

BOARD COMMUNICATION:

Before Program:
☐ Strategic rationale
☐ Program design recommendation
☐ Buyer identification
☐ Pricing proposal
☐ Legal considerations
☐ Risk assessment

Approval Needed:
☐ Program authorization
☐ Pricing approval
☐ Allocation methodology
☐ Communication plan
☐ Budget approval

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INVESTOR COMMUNICATION:

Considerations:
☐ ROFR/co-sale rights
☐ Information rights
☐ Potential participation
☐ Signaling concerns

Communication Approach:
☐ Lead investor pre-notification
☐ All investor notification timing
☐ Participation invitation
☐ New investor onboarding

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EMPLOYEE COMMUNICATION:

Announcement:
☐ Program overview
☐ Eligibility criteria
☐ Timeline
☐ Pricing information
☐ How to participate
☐ Tax considerations

Communication Plan:
Timeline:
T-14: Announce to all employees
T-7: Eligible employee details
T-0: Window opens
T+X: Window closes
T+X+7: Results communicated
T+X+14: Funds distributed

FAQs to Prepare:
☐ Why now?
☐ How is price set?
☐ What about taxes?
☐ Will this affect my job?
☐ Will there be future opportunities?
☐ Who is buying?
☐ Is the company doing well?

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FOUNDER/EXECUTIVE COMMUNICATION:

Special Considerations:
☐ Participation optics
☐ Different terms?
☐ Disclosure requirements
☐ Messaging alignment

Typically:
☐ Founders can participate but scrutinized
☐ May choose to limit/skip participation
☐ Must be comfortable with messaging
☐ Board input on executive participation

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LEGAL AND PROCESS

Secondary Transaction Process

SECONDARY TRANSACTION PROCESS

PHASE 1: PLANNING (Weeks 1-4)

Strategy:
☐ Determine transaction type
☐ Define program objectives
☐ Identify potential buyers
☐ Assess market conditions

Board Approval:
☐ Present proposal to board
☐ Obtain authorization
☐ Define authority levels
☐ Approve budget

Legal Framework:
☐ Engage securities counsel
☐ Review charter/agreements
☐ Identify restrictions
☐ Plan securities compliance

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PHASE 2: BUYER ENGAGEMENT (Weeks 3-6)

Buyer Identification:
☐ Existing investors
☐ New secondary funds
☐ Strategic buyers
☐ Crossover investors

Terms Negotiation:
☐ Price per share
☐ Minimum/maximum size
☐ Buyer due diligence rights
☐ Representations and warranties
☐ Closing conditions

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PHASE 3: DOCUMENTATION (Weeks 5-8)

Core Documents:
☐ Stock purchase agreement
☐ Tender offer document (if applicable)
☐ Seller representation letter
☐ Waiver of ROFR (if needed)
☐ Joinder to stockholders agreement

Employee Materials:
☐ Offer letter/participation invite
☐ FAQ document
☐ Tax summary
☐ Election form
☐ Stock power

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PHASE 4: EXECUTION (Weeks 8-12)

Seller Participation:
☐ Open participation window
☐ Collect elections
☐ Handle questions
☐ Track participation

Allocation:
☐ Compile elections
☐ Apply allocation methodology
☐ Communicate results
☐ Finalize participant list

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PHASE 5: CLOSING (Weeks 12-14)

Pre-Closing:
☐ Final documentation
☐ Funds confirmation
☐ Stock transfer setup
☐ Tax documentation ready

Closing:
☐ Execute documents
☐ Transfer shares
☐ Distribute funds
☐ Update cap table

Post-Closing:
☐ Confirm fund receipt
☐ Provide tax documentation
☐ Update records
☐ Communicate completion

Tax Considerations Summary

Scenario	Tax Implications	Documentation
ISO exercise + sale	Potential AMT on spread, long-term capital gain on sale if held 1 year	3921, 1099-B
NSO exercise + sale	Ordinary income on spread at exercise, capital gain on sale	W-2, 1099-B
Exercised shares sale	Capital gain (short or long-term based on holding)	1099-B
RSU settled + sale	Ordinary income at settlement, capital gain on sale	W-2, 1099-B

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