Secondary sales

The top three questions or themes explored in this session were…

1. An increasing desire to provide liquidity as companies stay private for longer – The timeline for a venture-backed company between raising its first institutional money to a listing has been stretched. There is far more private capital available, meaning companies can stay private for longer. However, this can create a liquidity problem for the company when early investors and/or employees want to realize a return on their shares / options. Companies have sought to address this by adding on secondary elements to primary financing rounds (or running a purely secondary round). This avoids further dilution, consolidates the cap table and provides liquidity to those who want it.
2. When, and to whom, to provide liquidity and what the impacts may be – We usually see secondary sales as a feature from Series B onwards, when investors are more willing to entertain the idea. Companies then need to consider whether the secondary sellers will be investors only or if it will be extended to option holders (i.e. employees and consultants). If the latter, the company should consider the impact that providing such liquidity may have on the business as those employees and consultants might decide to depart or need to be re-incentivized going forward.
3. The impact of stamp duty from a legal, process and practical perspective – Sellers and buyers (particularly if non-UK) may not be aware the transfer of shares in an English company is subject to stamp duty payable at 0.5% of the consideration over £1,000. This cost is usually the buyer's responsibility but that is not always the case. The transfer of shares may also not be registered until stamp duty has been paid and acknowledged by HMRC – a process which can take several weeks. All of these issues should be flagged up front so the parties are aware of the terms on which they are contracting.