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Growth stage financing - difference between 'primary' and 'secondary'?

What does it mean when a growth stage vc asks you if your upcoming financing round will include a "secondary"? I took it to mean a secondary offering. If it's a secondary offering does that mean one of the existing shareholders would have sell their shares? Does it mean a second close with anti-dilution rights on the primary? How does a secondary investment vehicle from a growth stage firm look and would love feedback/advice on the advantages /disadvantages on taking one. Also, why wouldn't you just take a larger primary?

Thanks all, much appreciated!


7 Replies

Mike Robinson
1
1
Mike Robinson Entrepreneur
Chief Commercial Officer at VideoEngager
I have not heard that term used in that context. Usually a "secondary" refers to a secondary public offering where a public company goes back to the markets and sells more shares to raise more cash.

In VC investing, there is often a "follow-on round" where the company raises additional money from existing VCs after achieving certain objectives (or due to unforeseen delays in the business plan). Usually a follow-on round is not explicitly planned out. It might be anticipated that this round will get the company to X date then you'll need to raise more money, but usually the terms of the follow-on are not committed in advance.

If the terms of multiple investment events are agreed in advanced, that is usually considered a "tranched" investment. For example: we'll give you $X now and if you get the prototype working we'll give you $Y more, then when you sell the first N customers we'll give you another $Z to scale it. This is usually not preferred by the founders or executives.

Any time you hear a term that seems unclear or ambiguous, don't be afraid to ask them what they mean. It's better to clarify immediately than to leave a miscommunication hanging around for weeks.
Jessica Alter
0
0
Jessica Alter Entrepreneur • Advisor
Entrepreneur & Advisor
Secondary market actually just means a market where new investors are buying from current investors, it does NOT have to be public markets. Second Market (the company) is based on private companies, as one example. Of late, it's become more and more common for founders (and employees) to want to raise money and get some liquidity before the main liquidity event. There are investors that specialize just in that - Founders Circle and 137 Ventures are two examples. Sometimes investors are fine with it and understand it's allowing the company to stay private longer while allowing founders to take some upside. On the other hand there are concerns that if it's done too early founders will check out and not be hungry.
Mike Robinson
0
0
Mike Robinson Entrepreneur
Chief Commercial Officer at VideoEngager
Jessica probably has it right. If you are well established and in a high growth phase, they probably meant to ask whether there will off-market trading of shares on one of the private exchange platforms.
Jessica Alter
0
0
Jessica Alter Entrepreneur • Advisor
Entrepreneur & Advisor
It does not need to be on a private exchange platform. There are firms that actually specialize in this and actually that would be way more common - 137 and Founders Circle Capital both do this exclusively. I sincerely doubt he thinks or wants you to do it on a platform.
Michael Brink
0
0
Michael Brink Entrepreneur
Founder at StayHub
Just means the investment is used to buy shares from existing shareholders vs the company issuing new shares. Primary is a dilutive investment and secondary isn't. Primary more common in less profitable/growth oriented businesses. Secondary more common in later stage/more profitable companies where the rationalization for doing a deal is motivated by getting existing shareholders some liquidity.
Jackson Powell
0
0
Jackson Powell Advisor
UI/UX Designer & Front End Developer
These are great answers and very helpful. Anonymous, if you have more VC questions and you'd like to work with a mentor I'd suggest you check out Lonnie Sciambi.

He's on FounderDating and offers to help entrepreneurs with direct access via email (and phone).
Mike Jung
2
0
Mike Jung Entrepreneur
Founder and Managing Director at Founders Circle Capital
Jessica is absolutely right - secondary simply means existing shareholders selling some of their shares to a new investor. Often in growth stage rounds, investors will invest in the company (a "primary" round) and often at the same time, purchase shares from other existing shareholders, whether they be founders, employees, or even early investors.

Often they do it because they want to own more than the company needs to raise in a primary, so one way to do that is to buy more shares from existing shareholders.


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