THE DOWNSIDE OF SECONDARIES

Summary from the TLDR Founders newsletter

Secondary sales give employees and investors liquidity in today's slow IPO market, but they come with a significant hidden cost. These transactions raise your company's 409A valuation by providing evidence of common stock value, which increases the exercise price for all future option grants. One executive found secondaries added $0.50 to his option price, costing him an extra $1M on his 2M share grant. When you want to sell shares, secondaries seem great. When you join a company and get options, they reduce your upside. Most employees never know these transactions happened, but they might be silently erasing millions in potential gains.