As discussed in a previous column, founders partially exiting through secondary transactions is not uncommon, but timing and context are critical factors. For instance, when Travis Kalanick sold a portion of his Uber stake during a significant secondary sale, the company was dealing with substantial losses and governance challenges. This sale heightened concerns rather than alleviating them. Similarly, secondary transactions by the founders of Byju’s, which appeared routine during peak valuation periods, took on a different light as financial difficulties and governance issues emerged.
Founders should consider several guidelines before proceeding with a secondary transaction. Firstly, it’s crucial to ensure that the startup has a promising future. During the seed to Series A stages, a startup is still establishing its market presence, making this period unsuitable for an exit. By Series B, once product-market fit is achieved and growth becomes steady—even amidst ongoing losses—selective secondary sales may not pose a problem. Brian Chesky’s management of a secondary sale at Airbnb is an example where this was successfully executed without disrupting the company’s momentum.
Secondly, it is important that the startup demonstrates strong momentum and clearly communicates its pursuit of market share in a rapidly growing sector. While losses alone may not erode trust, unexplained losses can be detrimental. In periods of high growth, companies like Zomato and Swiggy undertook significant capital expenditures, framing their losses as opportunities for expansion and market capture, which smoothed the path for measured secondary sales. Conversely, a small secondary sale during times of slowing growth or unmet targets could be perceived as hedging.
Entrepreneurs must be judicious about the extent of stake sales. While small portions sold to enhance personal financial security may be acceptable, larger sales intended to upgrade lifestyle and signal a diminished commitment are inadvisable. For example, Vijay Shekhar Sharma of PayTM executed partial stake sales while keeping a significant commitment to the company.
The context surrounding any secondary sale is also crucial. If an entrepreneur conducts a secondary transaction discreetly while delaying salaries, vendor payments, or laying off employees—particularly ahead of a down round of capital raise—it can foster negative perceptions. This scenario exemplifies the harshness of hindsight, as seen in Byju’s case.
Transparency is essential in executing secondaries. When managed appropriately, these transactions can build trust. For instance, Freshworks, under the leadership of Girish Mathrubootham, implemented structured liquidity options for employees prior to its public listing, which received positive feedback and did not create negative sentiment.
In summary, secondaries can be productive if executed correctly at the appropriate time. Founders should approach secondary transactions with the same care and timing as they would a product launch, ensuring that communication remains clear and transparent throughout the process.
