Startups Are Coming for Secondaries

Something has shifted in how late-stage startups approach their cap tables. Increasingly, companies are embedding clauses directly into primary financing agreements that give them more control over what happens when any shareholder tries to sell outside of company approval.

The most aggressive versions allow companies to claw back shares at cost if a holder attempts to sell — effectively wiping out any appreciation the shareholder has accrued. Others take a different form: dilution clauses that can compress a selling shareholder's position by 10-to-1, or ratchets that dramatically lower liquidation preferences for anyone who tries to exit before the company is ready for them to.

Why companies are doing this

The most straightforward, and candidly rational reason, is supply control. Secondary markets increase the supply of tradable shares, and more supply with the same demand means lower effective prices. When shares trade freely and/or at a discount to the last primary round, it undermines the valuation narrative the company is trying to maintain with its next set of investors. But more importantly, by constraining supply, companies apply upward pressure on price — which in turn makes primary financings easier to close at higher valuations because it's more difficult to acquire shares elsewhere. 

A second rationale is regulatory. Companies operating in defense, intelligence, or other government-adjacent industries face genuine restrictions on who can own their equity. Preventing shares from trading freely into the hands of foreign nationals or adversarial sovereign funds isn't just risk management — in some cases it's a requirement. These concerns are legitimate, and some form of transfer restriction is entirely reasonable in those contexts.

How it actually plays out

In practice, these provisions don't stop secondary activity. They just push it underground and make it more complex. When a shareholder wants to sell and the company has made doing so economically ruinous through direct channels, they don't give up — they find a workaround.

The most common today is a layered SPV structure: a special purpose vehicle that holds shares, wrapped inside another vehicle that can be transferred without technically triggering the company's transfer restrictions. The company never sees a share move; the economic interest quietly changes hands anyway. There are other versions of this that have previously been popular such as forward contracts, an agreement to buy or sell an asset at a predetermined price on a future date.

I experienced this firsthand — back in 2017 I personally bought a forward contract in Airbnb through a FINRA-registered broker-dealer. Because Airbnb didn’t allow forwards, buyers who purchased them had less legal standing to enforce the contracts at the IPO. They had paid real money for the promise of economic exposure to shares that the company did not necessarily recognize. Settlement became a mess: some contracts were honored between counterparties privately, others were disputed, and buyers who had been waiting years for a liquidity event found themselves in a gray zone. I ultimately got my shares, but it was a long, frustrating experience. The broader arc is a cautionary tale that is now playing out again but worse given that these markets are much bigger with far more activity. 

The result is a market that functions through more opacity than it needs to. Buyers and sellers transact through layered structures that obscure the underlying economics. Pricing is harder to discover. Due diligence is murkier. And the administrative complexity adds cost and friction that ultimately falls on someone — usually the seller, and often the least sophisticated one.

Who bears the cost

Basically everyone but the issuers. Retail investors and those without direct primary access either get locked out entirely or are forced to navigate complex SPV structures. Most don't have the legal resources to evaluate what they're actually buying, or the leverage to negotiate anything different. Existing investors aren't spared either; they may be sitting on significant gains but can't sell without risking clawbacks or other repercussions. 

It's worth pausing here to acknowledge what's been done right. Of all the private companies that have attempted to create a functioning secondary market for their shares, Kraken has done it as well as anyone (note I’m a small shareholder, but this plays no role in this opinion). They've built policy and infrastructure that allows shares to trade more or less freely — not perfectly, not without friction, but with a high level of accessibility and a consistent process. And they get paid a small fee for facilitating those trades, which is entirely fair. Running a secondary market is real work: legal coordination, transfer agent logistics, compliance overhead. Kraken earns that fee. The model won't work for every company at every stage, but as a proof of concept for what responsible secondary liquidity can look like inside a private company, it's the clearest example we have of private markets working. 

There's a version of this where founders deserve real grace. Building a company is hard, and the instinct to protect your cap table from noise — from short-term sellers undermining your narrative at a critical moment — is understandable. But that grace erodes the moment you take outside capital. When you raise a Series A, a B, a C, you're entering into an implicit contract: investors give you money, you give them equity, and that equity means something. Forcing those same investors to accept a 10-to-1 dilution ratchet — well after documents have been signed — if they ever try to sell isn't cap table management. It's rewriting the terms of a deal that was already done. 

A note to any founders reading this: I'm in the middle of building something right now alongside some incredible partners, and as we’re concluding a fundraise, I’m spending a significant amount of time thinking through cap table dynamics. At this stage, I view every investor in our business as a partner of ours. But ask me in three years, and maybe I'll be sitting across the table from you, having introduced the exact provisions I'm critiquing here, for reasons I don't yet fully understand. I'm genuinely open to that. If you're a founder who thinks my reading is wrong, I want to hear it. And if this resonates— we'll do a follow-up issue and dig into the founder's pov more. 

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✍️ Written by Zachary and Alex