Should we allow employees to cash out their stock options on secondary markets?
There’s unlikely to be an exit before at least Series B — and if an employee were to ask about secondary early in a startup’s life, it might raise eyebrows about their commitment to, and belief in, the company’s long term vision.
The most common route to secondary sales is still as part of a fundraise by the company. If there is excess investor demand, companies often allow employees a chance to sell a portion of their vested options. This is usually limited to a percentage of their vested holding, a maximum $ value, employees beyond a certain tenure, or some combination of these, to ensure that employees are still motivated to grow shareholder value through their remaining holding.
Typically such secondary sales when part of a fundraise will be at a discount (10–15%) to the primary offering, since stock options convert to ordinary shares rather than preferred stock. Employee secondary is very rarely offered at Series A, minority of time at Series B, but is common from Series C onwards. More than anything, it depends on how long it has taken for companies to move through this sequence, as this dictates how much pent-up demand, and how vested, your employee base is likely to be.
Whilst technically possible, it is very unusual to be able to sell stock options through a private sale or on a secondary market without the co-operation and support of the company. Companies typically have a right of first refusal, and they may be concerned about the implications of a private sale on their 409a valuation.
For more detailed guidance on stock options for early stage startups, check out the Index Ventures Rewarding Talent handbook and OptionPlan app.
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