I see it constantly. VCs, angel investors, even other founders—they’re all screaming from the rooftops about secondary markets. "Get liquid!" they yell. "It's a game-changer!" They paint a pretty picture, a world where you can cash in on your paper wealth long before an IPO or acquisition. It sounds like a dream, but I’m here to tell you it’s a nightmare in disguise for most startups.
I’ve personally witnessed more promising companies crumble under the weight of a premature obsession with secondaries than for almost any other reason. It’s a seductive path that feels like the smart move, but it’s a trap that can kill your returns and your company. I’m not just saying this; I’ve lived it. With two successful exits (RemoteTeam acquired by Gusto, MovieLaLa acquired by Gfycat) and over 200 angel investments in companies like Anthropic, OpenAI, and Scale AI, I’ve had a front-row seat to the good, the bad, and the ugly of startup financing.
The Seductive Illusion of Progress
Let’s be honest, chasing a secondary feels like you’re getting something done. You’re on calls with investors, you’re looking at term sheets, you’re building financial models. It feels like you’re making real, tangible progress. But it’s an illusion. You’re burning your most precious resource—your time—on financial gymnastics instead of what really matters: building a product that customers love.
Think about the sheer amount of time it takes. First, you have to decide if you even can do a secondary. That means hours with lawyers, pouring over your financing documents to see what rights your investors have. Then, you have to find a buyer. This isn't like selling public stock; it's a bespoke, painful process. You're pitching your company all over again, but this time to people who are looking for a discount, not a vision. You'll spend weeks, maybe months, in meetings and negotiations. All the while, your competitors are shipping product and stealing your customers.
I remember a founder, let’s call him “Alex.” He had a killer idea, a rockstar team, and early signs of real traction. But he got bit by the secondary bug. He spent a full six months, a lifetime in a startup, negotiating a deal. By the time the ink was dry, two new competitors had eaten his lunch. His early lead was gone. The company never got its momentum back. He walked away with a small check, but he traded a potential billion-dollar outcome for a rounding error. It still pains me to think about it.
This isn’t some isolated incident. The pressure to offer liquidity is real, especially when the market is hot. Your employees see their friends at other companies cashing out, and they start getting antsy. Your own investors might even nudge you to “clean up the cap table.” But let me be clear: a clean cap table in a dead company is utterly worthless.
Your Startup is Not Your Piggy Bank
The core of the issue is a deep misalignment of incentives. A startup is a high-stakes bet on the future. The goal is to build something massive, something that leaves a dent in the universe and, in the process, generates extraordinary returns. A secondary, on the other hand, is all about de-risking. It’s a quiet signal that you’re looking for the exit, even if it’s just a small one.
Think about the message that sends to your team. You’re telling them that you’re not fully committed to the long-term vision. You’re hedging. And if the captain is hedging, why shouldn’t the crew? Suddenly, that stock that was supposed to be a life-changing opportunity feels more like a lottery ticket. The energy shifts from long-term mission to short-term gain. Your best people, the ones who are motivated by the mission, will start to lose faith. They might not leave right away, but the seed of doubt has been planted.
And what about your investors? They didn’t back you to create an early payday for you and your team. They backed you because they believe you can build a category-defining company. When they see you distracted by secondaries, they start to question your hunger. That can make it a lot harder to raise your next round, especially from the top-tier funds that are looking for founders with an almost irrational level of ambition. They want to see you all in, not one foot out the door.
When Secondaries Aren’t a Terrible Idea
Now, am I saying all secondaries are a bad idea? No, that’s too simplistic. There are specific, limited situations where they can make sense. But these are the exceptions, not the rule.
So, when is the right time? Here are a few scenarios where I’ve seen it work:
- Late-Stage, High-Growth Companies: If you’re at the Series C stage or beyond, with a proven business model and strong, predictable revenue, a secondary can be a smart way to reward your early team members without the full-blown chaos of an IPO. The company is de-risked to a point where a secondary doesn’t send a panic signal. At this point, you're not just selling a dream; you're selling a piece of a well-oiled machine. The valuation is more stable, the business is more predictable, and the risk of a secondary distracting the team is much lower.
- Founder Life Events: Look, life happens. A founder might need to buy a house, deal with a family medical emergency, or put their kids through college. In these rare cases, a small, structured secondary can be a lifeline. But it needs to be a one-time thing, not an annual tradition. And it should be done with full transparency to your board and investors. The goal is to solve a specific life need, not to start living like a king before the company has won.
- Strategic Alignment: A secondary can be a clever way to bring a strategic investor onto your cap table. But this has to be about more than just the money. The new investor should bring real, tangible value—expertise, connections, or a partnership that can pour fuel on your growth. For example, if you're a SaaS company, bringing in a strategic investor who is also a major customer can be a huge win. They get a piece of the upside, and you get a powerful advocate for your product.
Notice what’s missing from this list? “Because everyone else is doing it.” Or “Because I want to buy a new sports car.” Those are the worst possible reasons to even think about a secondary.
The Devil is in the Details: SPVs, Cap Tables, and Follow-on Rights
Even if you have a legitimate reason for a secondary, the execution is a minefield. You have to navigate a labyrinth of legal and financial complexities that can blow up in your face.
- Special Purpose Vehicles (SPVs): These are often used to bundle small investors together. But they can turn your cap table into a tangled mess and create governance nightmares. You need to be incredibly careful about who is running the SPV and what their true incentives are. I’ve seen SPV managers who are more interested in their own fees than in the long-term success of the company. They can be a real cancer on your cap table.
- Cap Table Management: A messy cap table is a red flag for any future investor. Secondaries can make your cap table look like a crime scene. You need to keep it clean and simple, so new investors can easily understand what they’re getting into. Every new entry on your cap table is another person you have to manage, another signature you have to chase. It adds friction to everything you do, from raising your next round to eventually selling the company.
- Follow-on Investing Rights: When you sell shares in a secondary, you might be giving up your pro-rata rights to invest in future rounds. This is a classic rookie mistake. If the company continues to grow exponentially, you could be leaving an astronomical amount of money on the table. You’re selling your ticket to the moon for a bus ride back to earth.
I once saw a syndicate deal completely implode because the lead investor in the SPV had a shady reputation. The deal fell apart, and the founder was left with a mountain of legal bills and a fractured relationship with his early backers. It was a total disaster, and it was completely avoidable.
The Unsexy, Uncomfortable Truth
So if you shouldn’t be obsessed with secondaries, what should you be obsessed with? The answer is brutally simple, but it’s not easy.
Build a great business.
That’s it. That’s the secret. Pour every ounce of your energy into your product, your customers, and your team. Build something that people desperately want and are happy to pay for. If you do that, the money will follow. The exit, whether it’s a massive IPO or a strategic acquisition, will take care of itself.
I know that’s not the answer you’ll hear from the Twitter gurus. It’s not sexy. But it’s the truth. The most successful founders I know are the ones who are relentlessly, almost maniacally, focused on building a great company. They’re not distracted by financial engineering or the lure of a quick buck.
Stop worrying about getting liquid. Start worrying about building something that will outlast you. Your future self, and your bank account, will be eternally grateful.
Frequently Asked Questions
How can I apply this thinking to my own situation?
Start by identifying the core principle behind the opinion, not the specific example. Then ask yourself: does this principle apply to my context? If yes, test it in a small, low-risk way before going all in.
What's the most common pushback you get on this?
People often push back by citing exceptions or edge cases. And they're usually right that exceptions exist. But building a strategy around exceptions rather than patterns is a losing game for most founders.
Do all experts agree with this view?
No, and that's fine. The best ideas in business are often contrarian. I share my perspective based on my experience and data, but I encourage you to seek out opposing viewpoints and form your own conclusions.
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.