Glossary - Secondary Financing
Secondary financing refers to any loan or debt incurred in addition to a primary loan, secured against the same assets as the first loan but typically subordinate in terms of repayments. In the context of venture capital and private equity, it also refers to the process of selling existing shares or securities in a company from one investor to another without raising new capital for the company itself.
Also known as
- Secondary sale
- Secondary market transaction
Use cases examples
- Share Purchase Agreement: The Share Purchase Agreement facilitates the sale of shares held by existing investors to new investors, with the provisions detailing the terms of sale, representations, warranties, and conditions precedent for the secondary financing transaction.
- Investor Rights Agreement: The Investor Rights Agreement may include tag-along rights that enable minority shareholders to participate in secondary transactions, ensuring they can sell their shares on similar terms as majority shareholders.
Considerations for investors
- Liquidity and Exit: Secondary financing provides investors an opportunity for liquidity and exit prior to a traditional IPO or acquisition.
- Due Diligence: Investors should conduct thorough due diligence to assess the current valuation and performance of the company, as secondary transactions do not typically involve fresh capital into the company.
Considerations for founders
- Impact on Cap Table: Secondary financing transactions can change the composition of a company's cap table without increasing the company’s capital.
- Valuation Considerations: Secondary sales may imply a valuation for the company which can set precedents for future financing rounds.
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