Venture capital and angel investing have been considered for years as one of the riskiest, but also one of the highest returns providing asset class. However, the main bottleneck has been the liquidity of the investments. While in the 2000s the average time to exit (IPO or M&A) in VC investments in the US was roughly 7 years, nowadays it takes 10-15 years before initial investors see the cash return of their investment. This, in turn, has increased the demand for secondary transactions, which provide liquidity halfway through the final exit. As there is not enough transparent information about the secondary market practices, here are a few tips on what to consider when an angel investor needs to sell its position:

1. When to sell?

You might need to consider selling some of your position both when your invested startup is super successful and has returned to you on paper 100x or when you have lost faith in it and you just need some liquidity. In the former case, a simple portfolio logic kicks in – it is not wise to keep too many eggs in the same basket – e.g. if you have 95% of your net wealth locked in one investment it might be reasonable to divest a bit. If you happen to be the lucky one and hit homerun then establish yourself a divestment strategy – for example, selling 10% every year out of your position.

2. How to sell?

Every company has its own shareholder agreement which governs the shareholder transactions. Probably you have not been acquainted with the SHA after your initial investment and don’t remember the details. Now it is time to dig out the legal documents and familiarise yourself with what kind of restrictions you might have in place for selling your stock: is the secondary transaction allowed or does it need to be run centrally by the company; do you need formal management board approval; what type of right of first refusal procedure is in place?

Once acquainted with the procedures, inform the management/founder about your wish – they might know whether there are existing investors who want to increase their stake or the company will be running a centralized secondary deal as part of the next funding round.

3. To whom to sell?

Usually, the fastest process in selling your stock is finding an existing investor who is already part of the cap table. However, if you want to get a full understanding of the value of your stock, you might also want to consider inviting some external investors to make an offer for you. You can utilize your current investor network or approach some of the dedicated secondary investors like Siena Secondary Fund.

4. What is the right price?

As angel/VC investments are very illiquid by nature, it is hard to establish the right price at any given point of time. However, if there will be or there has been recent funding round, this can be considered as a reference point in pricing the value of your stock. As a general rule, some sort of discount is applied to the latest valuation, typically 10-25%, but in rare cases, there can be no discount or even a premium if the company is super successful and there is a motivated buyer. The discount size is also linked to the stage of the startup (i.e. the earlier the higher) and also the traction and growth the company has achieved (i.e. higher growth drives demand for the company shares hence pushing down the discount).

In conclusion, secondary transactions are becoming more and more a norm in VC/angel investing as the exit horizons get longer and longer. Having a systematic approach towards it will benefit the investor and help to have a balance of risk and liquidity in its investment portfolio.

More information:

Rando Rannus
General Partner
Siena Secondary Fund

NB: Nothing contained in this website should be construed as investment advice.