Secondary Sales for Startup Founders: When and How to Sell

What Is Driver-Based Revenue Forecasting?

A revenue forecast is a projection of the money your business will earn over a defined future period. There are two ways to build one:

Top-down forecasting starts with the total addressable market and works down to a market share assumption: “The UK B2B software market is worth £10 billion. If we capture 0.1%, we generate £10 million in revenue.” Useful for sizing the opportunity, useless for operational planning. Investors have heard thousands of 0.1% market share projections and are rightly sceptical.

Bottom-up, driver-based forecasting starts with the specific activities that generate revenue: “We have capacity to run 20 outbound sales conversations per week. Our conversion rate is 10%. Our average contract value is £12,000 per year. That gives us 2 new customers per week, or roughly 100 new customers per year, generating £1.2 million in new ARR.” Every assumption in that chain is testable, improvable, and explainable.

Driver-based forecasting is also the input layer for your 3-statement model — your revenue drivers feed the income statement, which integrates with the balance sheet and cash flow statement.

Why a Revenue Forecast Startup Needs a Different Approach

Established businesses forecast revenue by extrapolating historical data. Startups do not have historical data. The entire forecast must be built on forward-looking assumptions rather than trend lines. A driver-based model built on transparent assumptions is actually more useful to an early-stage investor than a statistical extrapolation, because it makes the business logic explicit and discussable.

The Core Framework: Identify Your Revenue Drivers

Secondaries occupy a strange place in startup culture. Everyone does them and nobody wants to be seen doing them. This post is about the mechanics, which are unglamorous and worth understanding before the conversation arrives.

What is a secondary sale and how is it different from a primary round?

In a primary round, the company issues new shares and the money goes into the company's bank account to fund the business. In a secondary sale, an existing shareholder sells shares they already own to a buyer, and the money goes to that shareholder. No new shares are created and the company receives nothing.

The consequences follow directly from that distinction.

A primary round dilutes everyone, because the share count grows. A secondary dilutes nobody, because the share count is unchanged. The shares simply change hands. If you sell 500,000 of your shares to an investor, the company still has exactly the same number of shares outstanding, the same cash, the same runway. Only the register changes.

A primary round is priced by negotiation over the company's value and future. A secondary is priced by negotiation over what a specific buyer will pay a specific seller for a specific block of illiquid, minority, common stock with no information rights and no control. Those are different assets, which is why they trade at different prices even on the same day. More on that below, because it is the part founders find most annoying.

A primary round has the company as a party. A secondary is, formally, between you and the buyer, but the company is deeply involved anyway: your shares are almost certainly subject to transfer restrictions, a right of first refusal in favour of the company, a co-sale right in favour of the investors, and board approval. You do not get to sell your shares to whoever you like. Check your shareholders' agreement before you have any conversation you cannot unwind. The relevant provisions are usually the ones nobody read at the time, and they are covered in outline in our term sheet explained piece.

The usual context for a founder secondary is that it happens alongside a priced round, as a negotiated allocation. An investor who wants to put $30m in and cannot get enough of the round agrees to buy an extra few million of existing stock from the founders. That structure is common because it solves the buyer discovery problem, the pricing problem and the approval problem all at once.

When does it actually make sense to sell?

Series B or later, when the company has real revenue and a real valuation, selling 5 to 15% of your personal holding, in a round where the investor is asking rather than you begging. Everything outside that description deserves scrutiny.

The honest case for a founder secondary is risk management, and it is a good case. Your entire net worth is in one illiquid asset whose value is correlated with your income, your career and your reputation. If the company fails, you lose your savings, your salary and your professional narrative at the same moment. That is a concentration no financial adviser would allow a client to hold, and the fact that founders hold it as a matter of course does not make it wise.

What a modest secondary buys is not luxury. It is the ability to make good decisions. A founder with a mortgage they cannot pay is a founder who will take a mediocre acquisition offer at $80m because it clears their preference stack and leaves them with something, when holding for two more years might have produced $300m. That founder's personal position is actively working against the company's interests, and every experienced investor knows it. This is the argument that persuades boards, and it happens to be true.

The case against selling too early is equally real. At seed and Series A, the company is worth what the last investor said it was worth, which is not much of a fact. Selling then means selling at the worst price you will ever get, and it means signalling to your investors that you are managing your downside before you have built anything. It also raises a question that is difficult to answer well: if you believe the story you told in the pitch, why are you selling?

The case against selling too much is about incentives. An investor is buying your commitment as much as your business. A founder who has taken $15m off the table and owns a diminished stake is a different economic animal from one whose entire future depends on the outcome. There is a threshold beyond which the alignment breaks, and while nobody can tell you exactly where it is, everyone can tell when you have crossed it.

The rough consensus, and it is a convention rather than a rule, sits around 5 to 15% of a founder's holding at Series B, sometimes up to 20% at later stages. Enough to change your life materially. Not enough to change your motivation.

Timing is the other half. The right time to raise the subject is when an investor is competing to get into your round, not when you are struggling to fill it. In a hot round, a secondary allocation is a concession the investor makes to win the deal. In a cold round, the same request reads as the founders looking for an exit. Same transaction, opposite signal. This is one of several reasons that fundraising timeline discipline matters: you want to be having this conversation from a position of demand.

How do you price a secondary, and why is it below the primary price?

The secondary price is almost always a discount to the primary price, commonly somewhere in the range of 10 to 30%, and the reason is that you are selling a genuinely different security, not the same one at a worse price.

The primary investor buying at $8.00 per share in the round is buying preferred stock. That comes with a liquidation preference, anti-dilution protection, information rights, pro rata rights on future rounds, and usually a board seat or observer rights. It is a package.

You are selling common stock. No preference, so you are at the bottom of the waterfall. No anti-dilution. No information rights. No board seat. In a downside scenario, your common shares are worth zero while the preferred shares are still being paid out. The two securities have different payoff profiles, and the gap is largest precisely in the outcomes that are most likely.

So a discount is not the buyer squeezing you. It is the buyer correctly pricing a worse instrument. When founders push back on this, they are usually implicitly arguing that common and preferred should trade at the same price, which is the same as arguing the liquidation preference is worthless, which no founder actually believes.

Now the arithmetic. Continue with the same company we used in our waterfall example, which has already raised a seed, a Series A and a Series B. It is now pricing a Series C at $8.00 per share for a $30m primary raise. The founders want to sell alongside.

The buyer offers $8.00 for the preferred it is buying primary, and $7.20 for the founders' common secondary. That is a 10% discount, at the tighter end, reflecting a company that is performing well and a buyer that wants the allocation.

The founder, Ana, holds 4,800,000 shares out of 17,700,000 fully diluted, which is 27.12%. She sells 500,000 shares.

Gross proceeds: 500,000 x $7.20 = $3,600,000.

Suppose she had held out for $8.00 flat and the buyer had agreed: 500,000 x $8.00 = $4,000,000. The discount cost her $400,000, which is what the 10% is worth on this block.

Her position afterwards:

	Before secondary	After secondary
Ana's shares	4,800,000	4,300,000
Fully diluted total	17,700,000	17,700,000
Ana's ownership	27.12%	24.29%
Ana's cash	$0	$3,600,000 gross

Check: 4,800,000 - 500,000 = 4,300,000. And 4,300,000 / 17,700,000 = 24.29%. Correct. The fully diluted total is unchanged because no new shares were issued in the secondary itself.

Note carefully what did not happen. The company's cash did not change. The other shareholders' percentages did not change. Ana's co-founder Marcus still holds exactly what he held. The only movements are Ana's share count down by 500,000 and the buyer's share count up by 500,000.

Now layer the primary round on top, because in reality both happen together. The $30m primary at $8.00 per share issues 3,750,000 new shares.

Check: $30,000,000 / $8.00 = 3,750,000 shares. Correct.

New fully diluted total: 17,700,000 + 3,750,000 = 21,450,000.

Holder	Shares after both	Ownership
Ana (common)	4,300,000	20.05%
Marcus (common)	3,200,000	14.92%
Seed preferred	2,000,000	9.32%
Series A preferred	2,500,000	11.66%
Series B preferred (existing)	5,000,000	23.31%
Series C primary (new)	3,750,000	17.48%
Series C secondary buyer (common from Ana)	500,000	2.33%
Option pool (net)	200,000	0.93%
Total	21,450,000	100.00%

Check the share count: 4,300,000 + 3,200,000 + 2,000,000 + 2,500,000 + 5,000,000 + 3,750,000 + 500,000 + 200,000 = 21,450,000. Correct.

Check the percentages: 20.05 + 14.92 + 9.32 + 11.66 + 23.31 + 17.48 + 2.33 + 0.93 = 100.00. Correct.

Ana has gone from 27.12% to 20.05%. Decompose that move, because the two causes are different in kind. The secondary took her from 27.12% to 24.29%, a 2.83pp reduction, and she was paid $3.6m for it. The primary round took her from 24.29% to 4,300,000/21,450,000 = 20.05%, a further 4.24pp, and she was paid nothing for it, because that is dilution and dilution is the price of the company having $30m it did not have before.

Marcus, who sold nothing, went from 18.08% to 14.92% purely through dilution. Check: 3,200,000/21,450,000 = 14.92%. Correct. He owns a smaller share of a better funded company, which is the normal trade.

What does a secondary do to your 409A and your option grants?

It usually pushes the 409A valuation up, sometimes sharply, and that makes every option you grant afterwards more expensive for employees to exercise. This is the consequence founders most often fail to anticipate.

The logic is straightforward once you see it. A 409A valuation is an independent appraisal of the fair market value of your common stock, used to set option strike prices. The appraiser's job is to estimate what common stock is worth. If a large, arm's length transaction in your common stock just occurred at $7.20 per share, the appraiser now has direct market evidence of what your common stock is worth. It is very hard to argue that your common stock is worth $2.40 for option purposes when a sophisticated buyer paid $7.20 for a meaningful block of it last month.

Before the secondary, with only preferred rounds to work from, an appraiser applies a discount to the preferred price to reflect the preference stack and the lack of marketability, and might land somewhere well below the $8.00 preferred price. After a real common stock trade, that reasoning is largely displaced by the actual transaction.

So the sequence is: you sell at $7.20, your next 409A comes in at or near $7.20, and every option granted afterwards has a strike near $7.20 instead of near $2.40. For an employee joining next quarter with a 50,000 share grant, the cost to exercise moves from $120,000 to $360,000. That employee is now far less likely to ever exercise, which quietly degrades the value of the equity component of your offer at exactly the moment you are trying to hire aggressively with your new $30m.

Check that: 50,000 x $2.40 = $120,000. 50,000 x $7.20 = $360,000. The difference is $240,000 of cash the employee must find.

This does not mean do not do a secondary. It means sequence it deliberately. If you are planning a large hiring push, consider making the grants before the secondary closes rather than after. If you have a pending 409A refresh, understand how the transaction will feed into it. And be honest with yourself that a founder secondary makes founder equity more liquid while making employee equity less accessible, which is an optics problem as well as an economic one. The teams who handle this well are the ones who arrange a small employee secondary window alongside the founder sale, so that the liquidity is not purely a founder benefit.

Not every secondary moves the 409A. A small transaction, or one between existing holders at a price that is not arm's length, or one where the buyer had strategic reasons unrelated to fair value, can all be argued down by a competent appraiser. But do not assume it. Ask the question before you sign, not after.

This is educational content, not tax, legal or investment advice. Secondary transactions have significant tax consequences that depend on your holding period, your jurisdiction, the character of the gain, and the specific structure. Take advice before you commit.

How do you get a secondary approved without damaging the relationship?

Raise it early, frame it as risk management rather than reward, propose a specific and modest number, and let the investor lead on price. The failure modes are almost all about framing rather than substance.

Raise it early means during the term sheet negotiation, not after. A secondary discovered by an investor's lawyer during diligence, when the founders had not mentioned it, reads as concealment even when it was merely disorganisation. Put it on the table while the terms are still being written and it is simply a term.

Frame it as risk management because that is the argument that actually works, and because it is the one that is true. "I have been doing this for five years on a below market salary, my entire net worth is in this company, and I want to take enough off the table to stop that being a factor in my judgement" is a sentence experienced investors have heard many times and generally respect. "I want to buy a house" is fine too and more honest than most alternatives. What does not work is anything that sounds like reduced belief in the outcome.

Propose a specific number and keep it modest. Vagueness invites the investor to imagine the worst version. "We would like the two founders to sell 5% of our respective holdings, roughly $2.9m in total" is a proposal. "We were wondering about some liquidity" is an anxiety.

Let the investor lead on price. You have a conflict of interest here that you cannot argue your way out of: you are simultaneously telling the buyer the company is worth a great deal and negotiating hard for a high price on your own shares. Push on the discount and you undercut the primary story. Most founders overrate the price and underrate whether the deal happens at all. A 20% discount on a transaction that closes beats a 5% discount on one that does not.

Two practical notes. First, get the paperwork right and get it into the data room properly, because a sloppily documented secondary is a diligence problem in every subsequent round and at exit. Rights of first refusal must be waived correctly, co-sale rights must be offered and declined correctly, and board approval must be minuted. A secondary that was never properly approved is a cloud on title that surfaces at the worst possible moment.

Second, remember that a secondary does nothing for the company. It does not extend runway, it does not fund hiring, it does not change the burn. If your problem is that the company needs money, a secondary is not the answer to it and you should be looking at the primary side and at your runway and burn position instead. Keep the two decisions cleanly separate in your own head, because conflating them is how founders end up selling personal stock to solve a company problem, which is the worst of both worlds.

How should this show up in your model?

As a separate line that changes your personal position without touching the company's, and as a scenario you have already run before anyone asks.

Your financial model should be able to answer three questions in under a minute. What percentage do I own after this transaction and the round it sits inside? What is my expected personal outcome across the exit range, before and after selling? And what does the secondary do to the strike price on the grants I am about to make?

The second question is the interesting one, because it is where the case for selling either holds up or does not. Run Ana's position at a $200m exit and a $600m exit, using the post-round 20.05% and ignoring preference for a moment to isolate the effect. At $200m she is at $40.1m; her $3.6m secondary is trivial next to that and she gave up 2.83pp for it, which at $200m was worth $5.66m. She lost money by selling. At a $40m exit, where the preference stack means her common is worth close to nothing, the $3.6m is everything she gets. The secondary is insurance: it costs you in the good scenarios and saves you in the bad ones. Whether that is a good trade depends entirely on how much you need to be saved, which is a personal question and not a financial one.

That is the calculation nobody puts in a spreadsheet and everybody should. And it is why the answer is usually "sell some, not much, and stop thinking about it".

Frequently Asked Questions

Can I sell shares without my investors' permission? Almost certainly not. Founder shares are typically subject to transfer restrictions in the articles and the shareholders' agreement, a right of first refusal that gives the company and then the investors the chance to buy the shares first, and co-sale or tag-along rights that let investors sell alongside you on the same terms. Some agreements also require explicit board or investor majority consent for any founder transfer. Attempting a sale outside these provisions can void the transfer entirely and will certainly damage the relationships. Read your documents before you take a meeting.

Does a secondary sale dilute the other shareholders? No. This is the defining feature of a secondary. No new shares are created, so the total share count is unchanged and every other holder's percentage is exactly what it was. In our worked example, Marcus's percentage changed only because a $30m primary round happened at the same time, not because Ana sold. If Ana had sold on a standalone basis with no round attached, Marcus would still hold 18.08%. The confusion arises because secondaries usually happen alongside primaries, so founders see the two effects together and attribute the dilution to the wrong cause.

Is the discount to the primary price negotiable? Somewhat, but less than you would like, and pushing hard on it is often counterproductive. The discount reflects a real economic difference between common and preferred stock, so arguing it to zero means arguing that the preference is worth nothing. What genuinely moves it is competitive dynamics: in a heavily oversubscribed round, a buyer who wants the allocation will accept a tighter discount, sometimes 10% or less. In a round that is struggling, expect 25 to 30% or no secondary at all. The discount is mostly a function of how much the buyer wants in, which is another way of saying it is set by your company's performance rather than by your negotiating skill.

What about selling to a secondary fund rather than to my round investor? It is possible and there is a real market for it at later stages, but it is harder than the in-round route. Dedicated secondary buyers will want information you may not be permitted to share, they will apply a larger discount because they lack the relationship and the diligence access, and your existing investors may object to an unfamiliar name appearing on the register. The right of first refusal also means your existing investors get to buy the shares on those terms first, which they may well do. The in-round secondary exists because it routes around all of these problems at once. Consider a third party buyer as a fallback, not a first choice.

Should employees get a secondary window too? It is worth arguing for, and it makes your own sale considerably easier to justify. Employees have been accepting below market cash compensation for equity that they may not be able to exercise and certainly cannot sell. A tender offer that lets long-tenured employees sell a slice of their vested holding is a genuine retention tool and it removes the awkwardness of founders being the only people with liquidity. It is more administrative work, it needs careful handling of the disclosure and tax position for participants, and it will affect your 409A more than a founder-only sale would. But a founder secondary with no employee window is noticed by the team, and it costs you something less measurable than the 409A does.

Further Reading

• What Is a Startup Financial Model?
• The Rule of 40 Explained
• Churn Rate Calculation and Cohort Analysis
• Runway and Burn Calculator
• Financial Model Pro