secondaries

Direct Secondary

Last updated September 20, 2026

Quick Answer

A purchase of shares in a private company directly from an existing holder, rather than a purchase of an interest in the fund that owns them.¹

What it is

A direct secondary is the sale of a private company's shares by an existing shareholder, typically a founder, employee or early investor, to a new buyer. The buyer joins the cap table; no new money reaches the company. Two bodies of rules govern it. The shares are restricted securities, which Rule 144 defines to include securities acquired directly or indirectly from the issuer or an affiliate in a transaction not involving any public offering, so a resale needs an exemption. And the company's documents restrict the transfer: the NVCA Right of First Refusal and Co-Sale Agreement makes a selling key holder give the company and each investor a proposed transfer notice, grants the company a right of first refusal at the buyer's price and terms, and grants investors a secondary refusal right over what the company leaves.^1,2

In Practice

Hypothetical. An employee agrees to sell 100,000 shares of common stock at $9.00 per share, $900,000 in total, to a secondary buyer. Under the NVCA form the employee delivers a proposed transfer notice no later than 45 days before consummation, the company has 15 days after that notice to deliver its company notice, and investors then have 10 days after the company's secondary notice deadline to exercise their secondary refusal right. The company takes 40,000 shares, investors take 25,000 pro rata, and the outside buyer gets the remaining 35,000; 40,000 plus 25,000 plus 35,000 equals 100,000. Because every exercise is at the same price and terms, the employee still receives 40,000 x $9.00 = $360,000 from the company, 25,000 x $9.00 = $225,000 from investors and 35,000 x $9.00 = $315,000 from the buyer, totalling $900,000. The buyer ends up with 35 percent of the shares it agreed to buy.

Operational context

What good looks like

The term is tied to a real workflow, not just a definition.
Ownership, timing, and evidence are clear.
The reader can tell what decision the concept supports.
Related terms point to the next useful explanation.

Why It Matters

Direct secondaries are how employees get paid before an exit and how new investors get into a company that is not raising, which is why both sides routinely underestimate how much control the company has. The refusal rights, the prohibited-transferee list and the board's discretion over non-cash consideration mean a signed purchase agreement with a shareholder is an option on a transfer, not a transfer. Price it that way: model the case where the company and its investors take most of the shares, and confirm the seller's Rule 144 holding period before spending money on diligence.¹

What is direct secondary?

A direct secondary is a purchase of shares in a private company straight from someone who already owns them. The company issues nothing and receives nothing, because the money goes to the selling shareholder. Contrast a fund secondary, where the buyer takes a limited partner interest and inherits exposure to a whole portfolio.

Why the distinction changes the work

A fund secondary buyer diligences a portfolio and negotiates with a GP. A direct secondary buyer diligences one company, negotiates with an individual who often has no information rights, and then has to get past the company's transfer restrictions. Those restrictions, not the price, are where most direct secondaries die.

The two gates every direct secondary has to clear

Gate one is securities law. The shares are almost always restricted securities. Rule 144 defines restricted securities to include securities acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering, which is what a stock option exercise or a preferred round purchase is.

Rule 144 then sets the holding period the seller must have satisfied. For an issuer that has been subject to the SEC's reporting requirements for at least 90 days before the sale, a minimum of six months must elapse between the later of the date the securities were acquired from the issuer or an affiliate of the issuer and any resale. For an issuer not subject to those reporting requirements, which describes essentially every venture-backed private company, a minimum of one year must elapse.

Rule 144 is not the only route. Securities Act section 4(a)(7) provides a resale exemption where each purchaser is an accredited investor as defined in Rule 501(a), there is no general solicitation or general advertising, the seller is not the issuer or a subsidiary of the issuer, the securities are not part of an unsold underwriter's allotment, and the class of securities has been authorized and outstanding for at least 90 days before the transaction. For a non-reporting issuer the section also requires that the seller provide prospective purchasers with reasonably current information including the issuer's name and address, a description of its business, financial statements, the names of its officers and directors and its transfer agent details. And it excludes bad actors, barring participation by persons subject to disqualifying events under Rule 506(d)(1) or statutory disqualifications.

Gate two is the company's own paperwork, and in practice it is the harder one.

What the company's documents do to your deal

The NVCA Right of First Refusal and Co-Sale Agreement, updated April 2026, is the standard form and the mechanics run in sequence.

A key holder proposing a transfer must deliver a proposed transfer notice to the company and each investor no later than a bracketed 45 days before consummation, and that notice must contain the material terms and conditions including price and form of consideration, the identity of the prospective transferee and the intended date. Each key holder unconditionally and irrevocably grants the company a right of first refusal to purchase all or any portion of the transfer stock at the same price and on the same terms and conditions as those offered to the prospective transferee. The company must deliver its company notice within 15 days after the proposed transfer notice, specifying how many shares it will take.

If the company does not take everything, investors get a secondary refusal right to purchase up to their pro rata portion, based on the total capital stock held by all investors, of whatever the company left. The company must send a secondary notice to that effect no later than 15 days after the proposed transfer notice, and an investor exercising must deliver an investor notice within ten days after that deadline. Where investors exercise on some but not all of the remaining stock, the company sends a company undersubscription notice within five days after the investor notice period to those who fully exercised, so they can take more.

There is a separate co-sale layer. The right of co-sale is the right, but not the obligation, of an investor to participate in the proposed transfer on the terms in the proposed transfer notice; an investor wanting to exercise must give the selling key holder written notice within 15 days after the deadline for delivery of the secondary notice. If a key holder sells in contravention of the co-sale right, that is a prohibited transfer, and the remedy is severe: in addition to any other remedy, the participating investor may require the key holder to purchase from it the type and number of shares it would have been entitled to sell to the prospective transferee.

Two more provisions kill deals outright. The form prohibits a key holder from transferring to a competitor, to a customer, distributor or supplier where a majority of the disinterested directors determines the transfer would give that party information placing the company at a competitive disadvantage, or to a sanctioned party, with a bracketed prohibition on transfers to a foreign person that would acquire triggering rights under the Defense Production Act. And where the consideration offered is property, services or other non-cash consideration, its fair market value is as determined in good faith by the board of directors, which means the board sets the number the company and its investors can match.

Worked example, arithmetic shown

All figures are hypothetical.

An employee at a non-reporting company wants to sell 100,000 shares of common stock, acquired by option exercise 19 months ago, at $9.00 per share.

Step one, test the holding period. The issuer is not subject to SEC reporting requirements, so Rule 144 requires a minimum of one year between acquisition from the issuer and resale. Nineteen months is more than twelve, so the period is satisfied.

Step two, size the trade. 100,000 x $9.00 = $900,000 of gross proceeds if the whole block reaches the buyer.

Step three, run the notice clock, using the NVCA form's bracketed defaults.

Proposed transfer notice: delivered no later than 45 days before consummation.
Company notice exercising the right of first refusal: within 15 days after the proposed transfer notice.
Secondary notice, if the company is not taking everything: no later than 15 days after the proposed transfer notice.
Investor notice exercising the secondary refusal right: within ten days after that secondary notice deadline.
Co-sale notice, if an investor wants to sell alongside: within 15 days after the secondary notice deadline.

Step four, allocate the shares after exercises.

Company takes 40,000 shares.
Investors take 25,000 shares under the secondary refusal right.
Outside buyer receives the remainder: 100,000 minus 40,000 minus 25,000 = 35,000 shares.
Check: 40,000 + 25,000 + 35,000 = 100,000. Correct.

Step five, confirm the seller is indifferent. Every exercise is at the same price and terms as the buyer's offer, so:

From the company: 40,000 x $9.00 = $360,000.
From investors: 25,000 x $9.00 = $225,000.
From the buyer: 35,000 x $9.00 = $315,000.
Total: $360,000 + $225,000 + $315,000 = $900,000, which matches step two.

Step six, read the result from the buyer's side. It spent diligence and legal fees expecting 100,000 shares and received 35,000, which is 35,000 / 100,000 = 35.0 percent of the intended position. Nothing went wrong; the form worked as written.

Common mistakes

Signing with a shareholder and treating the trade as done. Until the refusal periods run, it is an option the company and its investors hold.
Not asking when the seller acquired the shares, then discovering the Rule 144 one-year period is not satisfied for a non-reporting issuer.
Structuring consideration as something other than cash, which hands the board the valuation and makes matching easier, not harder.
Buying into a company where the buyer would be a competitor, a supplier the board objects to, or a foreign person acquiring Defense Production Act triggering rights. Those are prohibited transferees under the form.
Ignoring the co-sale layer. Investors can join the sale, which reduces the number of shares the seller can actually deliver.
Assuming section 4(a)(7) is available without checking the 90-day authorized-and-outstanding condition and the information delivery requirement for a non-reporting issuer.

How it relates to adjacent terms

A direct secondary is the company-level counterpart of a GP-led secondary: one moves shares of a portfolio company between holders, the other moves fund exposure between investors. Its orderly, company-sponsored form is the tender offer, where the company runs a single process at one price and waives its own refusal rights, which is why tender offers exist at all. And it is the transaction that makes founder liquidity possible before an exit, subject to every restriction described above.

Term Family

Related concepts

Secondary Market Secondary Sale Right of First Refusal Transfer Restrictions Tender Offer Founder Liquidity

Frequently Asked Questions

What is Direct Secondary in venture capital?

Why is Direct Secondary important for startups?

Understanding Direct Secondary is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.

What category does Direct Secondary fall under in VC?

Direct Secondary falls under the secondaries category in venture capital. This area covers concepts related to important concepts in venture capital.

Sources & References

1.NVCA Right of First Refusal and Co-Sale Agreement, updated April 2026National Venture Capital Association(Accessed 2026-09-20)
2.17 CFR 230.144 - persons deemed not to be engaged in a distribution (holding perCornell Legal Information Institute(Accessed 2026-09-20)
3.Securities Act section 4(a)(7), 15 U.S.C. 77d(a)(7)Cornell Legal Information Institute(Accessed 2026-09-20)

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