What’s Driving Increased Activity in Secondary Markets for Private Company Stock in 2022

18 March 2022 Foley Ignite Blog
Author(s): Louis Lehot

With the turmoil facing public markets in recent months, it’s not a wonder that we have not seen a flood of IPO’s in the first quarter of 2022. With companies putting their IPO plans on hold, this means that employees looking to liquidate their shares are increasingly turning to secondary markets.

Secondary markets allow investors to purchase shares from private-company employees and early investors with equity in a company, rather than purchasing from the company itself.  This secondary market trading allows employees to cash out earlier, as opposed to waiting for an IPO.  There are several platforms available that allow shares to be traded pre-IPO.

As opposed to primary market pricing, which is determined beforehand, secondary market pricing is based more on supply and demand. The more investors rush to buy a stock based on their belief that it will increase in value, the more the price of that stock will continue to rise.

According to a recent article from Crunchbase, “The heightened interest in selling shares on the secondary market has already started to be reflected in lower prices for startups shares.”  The article points to information from secondary market platform Equity Zen indicating that “more shareholders are comfortable selling shares at lower prices than they would have late last year amid a robust IPO market.” 

In fact, EquityZen told Crunchbase they are seeing shares in some companies trading 10 percent to 30 percent lower in the first quarter of 2022 than they were in the fourth quarter of 2021.  EquityZen predicts that when primary rounds occur for those companies, they will likely reflect these lower prices.  While public markets have seen significant multiple compression and the IPO window has not been kind to new entrants in 2022, we are seeing signs of a trickle-down effect on private company primary financings.

As many factors continue to impact our public markets and create volatility, secondary markets will undoubtedly remain an attractive option for employees and early investors to liquidate their shares.  It remains to be seen whether this increase in secondary market training will continue once companies begin to move forward with IPOs in greater numbers, and what kind of an actual impact all this will have once these companies do begin trading on public markets.  

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