Secondary Sale

What is a secondary sale?

Secondary sale (German: Sekundärverkauf or Sekundärtransaktion) denotes the sale of already existing shares by a shareholder to a new or existing investor. Unlike a capital increase, the primary transaction, the company does not issue new shares; the purchase price goes to the seller and not into the company. In the startup environment, the process is also called a secondary transaction, or simply a secondary.

Secondary sales occur mainly in later funding rounds, frequently combined with a capital increase. Sellers are founders who want to secure part of their wealth, early business angels or funds whose term is ending. Buyers are the new lead investor who leads the round, existing investors or specialised secondary funds that deliberately take over existing shares. The legal basis is a notarially authenticated share purchase agreement.

Primary and secondary transactions compared

• Inflow of funds: In a primary transaction, the company receives equity for growth. In a secondary sale, the seller receives the purchase price, and the company's liquidity remains unchanged.
• Dilution: New shares dilute all existing shareholders proportionately (dilution). A secondary sale changes only the holdings of buyer and seller; the total number of shares stays the same.
• Shareholder structure: A secondary sale can tidy up the cap table, for example when many small holdings of early investors are consolidated with one buyer.
• Valuation: The price of the new shares determines the valuation of the round. The price in the secondary sale often deviates from it because the shares sold carry different rights; a markedly lower secondary price can nevertheless make investors doubt the valuation.

For investors, a secondary sale is a route to a larger holding than the company wants to issue in new shares. For founders, it creates private liquidity without the company having to be sold. Investors take care that founders afterwards remain economically substantially invested; a limit to a smaller part of the founders' shares is therefore common.

Secondary sale in a GmbH: legal implementation

Authentication and list of shareholders

In a GmbH (German limited liability company), the obligation and the assignment require notarial authentication (Section 15 (3) and (4) of the German Limited Liability Companies Act, GmbHG). Once the assignment has taken effect, the notary involved files a new list of shareholders (Gesellschafterliste). The buyer can exercise rights from the shares, such as the voting right, towards the company only once this list has been included in the commercial register (Section 16 (1) GmbHG).

Transfer restrictions and consents

The articles of association can make the assignment of shares subject to approval by the company or the shareholders (Section 15 (5) GmbHG). Such a transfer restriction (Vinkulierung) is the rule in growth companies. Until the required consent is given, the assignment is provisionally ineffective. The shareholders' agreement additionally often contains consent rights of the investors and lock-ups for founders, which exclude or limit a sale for a certain period.

Pre-emption rights and tag-along rights

Shareholders' agreements regularly grant the other shareholders a pre-emption right (right of first refusal): before a sale to third parties, the shares must be offered to the co-shareholders on the same terms. In addition, a tag-along right allows the other shareholders to join the sale proportionately. Both rights can reduce or delay a planned secondary sale. In practice, they are cleared for the specific transaction by waiver declarations of the beneficiaries, which are in place before authentication.

Price in a secondary sale: discounts to the round price

Founders generally hold shares without special preferential rights. Investors, by contrast, acquire new shares with a liquidation preference (priority in the proceeds on a sale) and anti-dilution protection (compensation if later rounds take place at a lower price). A buyer who takes over founder shares does not automatically receive these preferential rights and therefore often pays less than for new shares of the same round. The size of the discount depends above all on how much the preferential rights are worth at realistic exit values: with high exit expectations it is small, with tight valuations markedly higher.

Further factors are the size of the package, demand in the round and the question of whether the shares sold are equipped with preferential rights in the course of the sale. This presupposes an amendment to the shareholders' agreement, which the other shareholders must approve.

Taxation of the seller

Taxation depends on how the seller holds the shares. If a founder holds the shares as private assets and held at least 1% within the last five years, the gain is taxable under Section 17 of the German Income Tax Act (EStG). The partial income method (Teileinkünfteverfahren) applies: 60% of the gain is subject to the personal income tax rate, and 40% remains tax-free. In return, acquisition costs and disposal costs likewise reduce the gain only by 60% (Section 3c (2) EStG). For a holding under 1% in private assets, flat-rate withholding tax (Abgeltungsteuer) of 25% applies, plus solidarity surcharge and, where applicable, church tax.

If the founder holds the shares through his or her own GmbH (holding structure), the gain is, under Section 8b (2) and (3) of the German Corporation Tax Act (KStG), 95% tax-free in effect. The remaining 5% is treated as non-deductible business expenses and burdened with corporation tax, solidarity surcharge and trade tax. Caution is required if the shares were contributed to the holding company on a tax-neutral basis only within the last seven years (blocking period), that is, without taxation of the increase in value that had arisen up to then. The sale can then make the contribution retroactively taxable (Section 22 (2) of the German Reorganisation Tax Act, UmwStG). The amount to be taxed retrospectively falls by one seventh for each full year since the contribution. Which rule applies in an individual case belongs in the tax review before authentication.

The price of a secondary sale can also have an effect beyond the transaction. For tax purposes, the fair market value (gemeiner Wert) of unlisted shares is derived primarily from sales between independent third parties less than one year ago (Section 11 (2) of the German Valuation Act, BewG). A secondary price can thus become the benchmark for gifts of shares or for genuine employee shareholdings, for example. If the price deviates markedly from the value and the seller works in the company, it must also be examined whether part of the price is to be treated as employment income.

Worked example: a founder's secondary sale with tax burden

A GmbH completes a Series B round. The new shares with a nominal value of EUR 1 each are issued at EUR 1,000; after the round, 120,000 shares exist. A founder holds 18,000 of them (15%) as private assets, acquired at incorporation at nominal value. She sells 1,800 shares, that is, 10% of her holding, to the lead investor. Because of the absence of preferential rights, a discount of 15% to the round price is agreed. Notary and advice cost her EUR 12,000.

• Purchase price per share: EUR 1,000 minus 15% = EUR 850
• Sale price: 1,800 × EUR 850 = EUR 1,530,000
• Acquisition costs: 1,800 × EUR 1 = EUR 1,800
• Disposal gain under Section 17 (2) EStG: 1,530,000 minus 12,000 minus 1,800 = EUR 1,516,200
• Taxable under the partial income method: 60% of EUR 1,516,200 = EUR 909,720
• Income tax, simplified at the top rate of 45% on the entire amount and without church tax: EUR 409,374, plus 5.5% solidarity surcharge of EUR 22,515.57, together EUR 431,889.57
• Net proceeds: 1,530,000 minus 12,000 minus 431,889.57 = EUR 1,086,110.43
• Holding after the sale: 16,200 of 120,000 shares = 13.5%

The actual income tax is somewhat lower, because the tariff rises progressively and not every euro is taxed at 45%. The founder receives a good EUR 1 million privately and remains substantially invested with 13.5%, as investors expect in founders' secondary sales.

Had the founder held the shares through a holding GmbH from the start, only 5% of EUR 1,516,200 = EUR 75,810 would be taxable. With an assumed total burden of corporation tax, solidarity surcharge and trade tax of about 30% (as at 2026), the tax would be EUR 22,743. Under current legislation, the corporation tax rate of 15% falls gradually from 2028 to 10% in 2032. The proceeds would, however, sit in the holding company; a later distribution to the founder would be taxable again. The comparison therefore shows above all that the shareholding structure belongs in tax planning long before a sale.

Distinctions: secondary sale, capital increase and trade sale

• Capital increase: issue of new shares against a contribution to the company. It finances the company, whereas the secondary sale finances the seller. It is implemented through the investment agreement; in combined rounds, both transactions are frequently authenticated at the same notary appointment.
• Subscription right (pre-emptive rights): the right to take part proportionately in a capital increase. It concerns new shares; in a secondary sale, pre-emption and tag-along rights apply instead.
• Company sale (trade sale): sale of the majority or all shares to an acquirer. The secondary sale usually concerns a minority holding and leaves control unchanged.

Common mistakes

• Pre-emption rights overlooked. If final negotiations are held with a buyer before the beneficiaries have waived, co-shareholders can draw the shares to themselves on the same terms.
• Consent under the articles of association missing. Without the required approval, the assignment of shares subject to transfer restrictions does not take effect.
• Share sold too large. If a founder sells a large part of his or her shares, the economic commitment to the company falls; investors respond with rejection or additional commitment requirements.
• Tax structure reviewed too late. A contribution to a holding company shortly before the sale, or a sale within the blocking period after a contribution, changes the expected tax burden considerably.
• Equal treatment neglected. If only individual founders or investors may sell, tensions arise within the shareholder group that burden later decisions.

Frequently asked questions

Does the company receive money from a secondary sale?

No. The purchase price goes entirely to the selling shareholder. The company is affected only indirectly, for example by approval resolutions, the new list of shareholders and the effort of processing.

Can a founder freely sell his or her shares to third parties?

As a rule not. In growth companies, the assignment of shares is usually subject to transfer restrictions, that is, tied to consent under the articles of association. In addition there are pre-emption and tag-along rights of the other shareholders and possible lock-ups in the shareholders' agreement.

How large is the usual discount to the round price?

There is no fixed figure; the discount depends above all on the value of the preferential rights that the shares sold lack. In sought-after rounds, founder shares are sometimes taken over close to the price of the new shares, in more difficult situations markedly below.

Can employees take part in a secondary sale?

Only if they hold real shares. Employees of German growth companies are usually involved through virtual shares, which do not embody a saleable share. Liquidity before an exit arises for them only if the company pays out part of the entitlements early; such a payment is employment income.

What does secondary sale mean in private equity?

There, the term usually means the sale of an entire portfolio company from one financial investor to the next, also called a secondary buyout. In addition, institutional investors sell their interests in private equity funds on a separate secondary market. Both transactions share with the partial sale in a funding round the principle: existing shares change hands without new capital flowing into the company.

The Roemer Capital view

In secondary sales, Roemer Capital advises the company and its shareholders. In funding rounds of Series B or C, the question often arises whether founders will sell part of their shares to the lead investor. Roemer Capital calculates the effects on the cap table and on the founders' remaining holding and negotiates scope and price in connection with the terms of the capital increase.

Roemer Capital pays attention to an orderly handling of pre-emption and tag-along rights, early coordination with all beneficiaries and a price that can be justified to later investors. The tax structure, above all for holding companies and running blocking periods, is clarified by the founders' tax adviser before authentication.