Secondary-First VCs are changing the liquidity landscape for founders by buying late-stage stakes in early-revenue startups—providing tailored exits, reshaping term sheets, and capturing discounted growth exposure outside traditional primary rounds. This model unlocks predictable founder outcomes while creating a distinct risk/return profile for funds that prefer secondaries over dilutive primary capital.
What does “Secondary-First” mean?
The term “Secondary-First VCs” describes investment funds that prioritize acquiring existing equity from founders, early employees, and early investors instead of—or before—writing new primary checks into a company. Instead of increasing the company’s valuation through a new round, these investors buy stakes at negotiated discounts, offering immediate liquidity without the usual dilution from a primary financing event.
How this differs from traditional secondary deals
- Timing: Secondary-first funds target early-revenue, late-seed to pre-Series B companies rather than mature late-stage companies.
- Intent: The priority is founder liquidity and optional cap table optimization, not solely portfolio diversification.
- Structure: Deals often come with bespoke term sheet tweaks—liquidity windows, warrant-like features, or future primary-rights—that align incentives for all parties.
Why founders choose Secondary-First VCs
Founders increasingly want flexibility: to de-risk personal financial exposure, retain optionality for future raises, and avoid the valuation pressure a primary round can create. Secondary-First VCs deliver:
- Tailored liquidity: Founders can sell a portion of their holdings to cover personal needs without changing company runway.
- Non-dilutive outcomes: Because capital changes hands between investors, the company’s equity pool and employee option economics remain intact.
- Faster processes: Secondary transactions can close quicker when the buyer is disciplined and has templates for early-revenue companies.
- Negotiable protections: Founders can agree to limited governance concessions while maintaining operational control.
How Secondary-First funds reshape term sheets
To manage risk and preserve upside, secondary-first funds often negotiate creative deal language that sits between a pure secondary sale and a primary investment:
- Liquidity tranches: Staggered purchases tied to milestones (MRR, ARR, revenue growth) rather than a single transfer.
- Performance collars: Price adjustments or contingent payments if the company materially under- or out-performs agreed metrics.
- De-risked warrants: Small warrant packages that vest on achieving specified growth targets, allowing buyers to re-engage in future upside.
- Limited governance: Observers or non-voting board rights, preserving founder control while offering the investor board-level visibility.
Examples of layered protections
- Escrowed portion of sale proceeds subject to indemnities and holdbacks for three to six months.
- Piggyback rights that let the secondary investor participate in future primary rounds under predefined caps.
- Convertible conservators: a small convertible tranche that converts only if the startup raises a primary round above a predetermined threshold.
The funds’ risk/return engine: discounted growth exposure
Secondary-first funds build returns by capturing growth exposure at a discount relative to the private market’s new-money valuation. Their returns depend on sourcing attractive sellers, pricing conservatively, and structuring upside participation. Unlike primary investors who benefit directly from a company’s total capital inflows, secondary-first funds benefit from price discovery and asymmetric upside delivered by modest structural features.
Key drivers of fund performance
- Sourcing advantage: Access to high-quality founder sellers who value speed and certainty.
- Pricing discipline: Buying at discounts that reflect the company’s stage-specific execution risk.
- Legal and operational efficiency: Standardized processes for diligence, transfer logistics, and regulatory compliance.
- Value capture mechanics: Warrants, conversion collars, and follow-on participation rights that amplify upside without full primary dilution exposure.
Practical negotiation checklist for founders
Founders negotiating with Secondary-First VCs should focus on four areas to balance liquidity and future flexibility:
- Price and tranche structure: Align on upfront price, and whether subsequent tranches depend on milestones.
- Governance carve-outs: Limit voting and board rights; prefer observer status or information rights if possible.
- Future financing impact: Ensure the secondary purchase doesn’t create anti-dilution triggers or restrictive covenants that would hinder future primaries.
- Tax and transfer logistics: Confirm gross vs. net proceeds handling, payroll/tax withholding, and post-sale lock-ups.
Case scenarios: When Secondary-First wins
Scenario A: A founder at an early-revenue SaaS company needs to buy a house and wants to preserve option pools for employees. A secondary-first fund buys a modest stake at a slight discount, leaving the cap table intact and enabling the founder to diversify personally without diluting the team.
Scenario B: An early investor seeks partial liquidity before a Series A but the company wants to avoid valuation pressure. A secondary-first fund structures a staged purchase with milestone-based price ratchets—providing liquidity while aligning incentives for continued growth.
Risks and considerations
Secondary-first models are not universally beneficial. Risks include signaling effects (market may infer issues if many insiders sell), potential tax complications for sellers, and the complexity of managing multi-party transfers. Investors must also accept that they won’t influence company strategy as directly as primary investors—so selecting deals where pure price exposure and minimal governance suffice is critical.
How this trend reshapes the funding ecosystem
By delivering non-dilutive liquidity, Secondary-First VCs shift power dynamics: founders gain optionality, early investors access returns without forcing a valuation event, and primary investors face a new peer competing for a later-stage narrative. Over time, term sheets and cap table norms will evolve to include standardized secondary protocols, making lifecycle capital allocation more flexible and founder-friendly.
Conclusion: Secondary-First VCs offer a pragmatic alternative to traditional primary rounds—giving founders tailored liquidity, reshaping term sheet mechanics, and providing funds with discounted growth exposure outside the primary market. For founders and funds alike, the approach combines speed, optionality, and a new set of risk/return trade-offs that are likely to become mainstream as more market participants standardize processes.
Interested in exploring a secondary-first strategy for your startup or fund? Contact an advisor to evaluate whether a tailored secondary can preserve your upside while delivering the liquidity you need.
