Pre-IPO Glossary — Part 1

Victor Koch Secondary

Venture capital (VC) and angel investing is an exciting arena of high risk and potential for high reward. Investors can invest in a private company during a round of raising capital, or investors can acquire these shares later from another investor. VC investments thus can be broadly categorized as either a primary investment or a secondary investment.

In a primary investment offering, investors purchase shares directly from the company, or issuer, which provides fresh capital for the company. In a secondary investment transaction, investors purchase shares from secondary sources that hold existing equity in the company, meaning shares are purchased from persons or entities other than the issuer, and this does not provide new capital to the company.

Early investments in startups that eventually successfully exit can provide a high return on investment, which makes pre-IPO investing an attractive addition to an investment portfolio for those willing to take on that high risk. However, startups are taking longer and longer to exit. From 2001 to 2021, the median age of a startup at its initial public offering (IPO) was 10 years.

As companies are increasingly staying private longer, the timeline for investor liquidity is also being extended for those waiting on the traditional exit event, such as the company going public or selling in a merger or acquisition deal. This leaves capital tied up in these investments.

Early investors and venture capital (VC) funds, as well as company employees or former employees, are thus trending toward looking for ways to liquidate sooner than a traditional exit, wanting to yield a return and/or recycle that capital into new investments. The secondary market for VC investments is growing in response to this need for liquidity in the face of extended exit timelines.

Indeed, the secondary market has been growing rapidly — between 2013 and 2021, the secondary market’s transaction volume increased at a 55% compound annual growth rate (CAGR) to an estimated $92 billion.

Secondary Investments

The secondary market for private investments offers shareholders and VC funds opportunity for liquidity ahead of exit events, and it can help both buyers and sellers of the shares better manage their investment portfolios. As private companies are waiting an increasingly long time to exit, early investors may need to rebalance or adjust their portfolio interests or risk levels before the company exits.

Other investors may be motivated to purchase these secondary investments due to various reasons, such as the ability to invest at a discount, to gain access to investments that are no longer available as a primary opportunity (i.e., the company is not raising a new round), and to add private equity shares to their portfolio that likely have a shorter exit timeline left than an early-stage primary investment.

Considerations for Secondary Investments

If you’re interested in investing in secondary VC opportunities, several considerations should be made. It’s important to do your due diligence on any opportunity before committing to the investment.

Examine Available Company Information

All investments come with risk, especially venture capital investments. You should review the company’s available financial information and performance news to decide if the opportunity fits your investing goals. Typically, secondary investors won’t be given a company’s private financial information, but you can review publicly available information from company press releases, any news interviews, and its website. Through these resources, you might be able to gather information related to the company’s revenue, partnerships, and growth over time to help you assess the company.

Know the Terms of the Secondary Offering

As with any private investment, review the terms carefully. A few things you might look at with a secondary investment are potential discounts and right of first refusal.


It’s difficult to value a company pre-IPO, and share values can be volatile and stray from predictions even when the company does go public. Due to the investor risk and difficulty of valuing a company at this stage, a discount may be part of a secondary VC investment. The discount is the percent by which the investor will receive more equity for the price compared with later investors (such as at the IPO).

Right of First Refusal

Some term sheets will include the right of first refusal for shares. This means that when an investor wants to liquidate an investment, the shares must first be offered back to the company/founders or an original VC investor, as described in the terms. Make sure you’re clear on whether there are any limitations and what those are in regard to first-refusal rights.

Invest in Secondary Offerings

Ready to jump in? If you’re looking to liquidate or invest in secondary opportunities, please contact us directly or DM me via Twitter.

About the Author

Mr. Koch — a serial entrepreneur and late-stage investor specializing in secondary shares.

Previously: Twilio, Xiaomi, iQiyi, PinDuoDuo, Tilray, Livongo, Agora, Bandwidth, Hims.

Currently: Robinhood, Enflame, Grab, Toss, Coursera, Oatly, Epic Games, Chime, and other companies.

The content was collected from various open sources, approved by companies, and does not provide any one-stop recommendation for the purchase of shares. All data was used for only informational purposes and does not contain insider information that may be malicious or refuted by the company and SEC.

This communication does not represent an offer or solicitation to buy or sell securities. Such an offer must be made via definitive legal documentation by the buyer or seller of securities, please check the SEC rules before buying shares from any stock-suppliers.

Serial entrepreneur, accredited investor, and hedge fund manager.