Startups 101: Understanding secondary share sales - why not all fundraising is created equal

In recent years, the media has increasingly blurred the lines between true capital raises and secondary sales, distorting the actual amount of new funding startups are receiving.

This confusion often misleads founders and investors, making it harder to understand the real financial position of a company.

For first-time founders, navigating the complexities of capital raising is already challenging, and when secondary sales are reported as ‘new money,’ it adds another layer of opacity.

Not all financial events serve the same purpose, and it’s crucial to recognize that some don’t contribute directly to a company’s growth.

What is a secondary sale?

In traditional fundraising, a company raises fresh capital by issuing new shares to investors. This injection of money allows the company to grow, hire new staff, and expand into new markets. When founders announce they’ve “raised” a certain amount of money, this is usually what people are referring to—new funds coming into the company to fuel growth.

The reason why we communicate with the media and celebrate a successful raise is because that injection of capital actually can make or break a company. In simple terms “Yesterday we had 6 more months or runway, and now we have millions of dollars to hire more people, achieve milestones and grow the company”.

Secondary sales, however, are a different type of transaction. Rather than new money coming into the business, secondary sales happen when existing shareholders—often early investors or employees—sell their shares to someone else.

This creates liquidity for those shareholders (meaning they can exchange their shares for cash). But most importantly, no new money is injected into the business itself.

While secondary sales can be a sign of a healthy and growing company—after all, investors are willing to buy those shares—it’s important for founders not to misrepresent these events as “fundraising.”

I used an example on LinkedIn that explains this really well:

Let’s say I buy a Chanel bag. Ten years later, I sell this bag to one of my friends. She gets this new bag, I get my money back, but Chanel isn’t included in the transaction. So, do you agree that Chanel couldn’t consider this number in their revenue growth? This is the clarity that we are advocating for startups when they reveal their funding rounds.

Why does it matter?

The issue arises when secondary sales are grouped with traditional funding rounds in media reports or data analysis.

A company may report raising millions of dollars, but if that money is just changing hands between investors, the company itself isn’t any better positioned to grow than it was before. This lack of transparency can confuse stakeholders, including potential investors, employees, and the broader startup ecosystem.

Startup Daily editor Simon Thomsen also raised a similar concern when reporting on SafetyCulture’s “$165 million” deal when he described it as a $75 million raise.

While the headline might suggest a fresh influx of capital, it’s essential to dive deeper and understand whether the money is truly earmarked for growth or merely a liquidity event for existing shareholders. Founders, especially those early in their journey, should be aware of how such events are framed and the potential for misunderstandings.

Advice for founders

Be Clear in Your Communication: If you’re announcing a secondary sale, be upfront about the nature of the transaction. Don’t frame it as a traditional raise unless new capital is being injected into the company.
Understand the Optics: Secondary sales are not inherently negative (in fact, it can be a sign of a healthy and growing company—after all, investors are willing to buy those shares), but they can be perceived as such if the market believes you’re raising new money when you’re not. Be mindful of how these events are reported and the potential long-term impact on your reputation.
Use Secondary Sales Strategically: If you’re in a position to facilitate secondary sales for early investors or employees, it can be a great way to reward those who have supported your journey. Canva did this exceptionally well