Tax Issues Related to Startup Secondary Sales

With the rise of so many unicorn companies, large valuations and financings are becoming more familiar to investors. In response, venture-backed startup companies are staying private for a longer period of time. Traditionally, holders of equity in private companies had to wait for a liquidity event, that is, either an acquisition or an initial public offering (IPO), to see any cash from their equity. "Secondary sales" enable employees to exchange their illiquid equity for cash before a liquidity event occurs.

There are significant tax issues related to secondary sales that all parties must consider with their tax advisors before conducting, facilitating, or participating in a secondary sales program. This article addresses the tax treatment of secondary sales, including specific factors that can create tax risk or affect the tax consequences.

Originally published through Thomson Reuters’ Practical Law on December 10, 2019.