A stapled secondary is a financing structure that combines primary shares (new capital raised by the company) with secondary shares (existing shareholder sales) in a single transaction. The secondary shares are 'stapled' to the primary offering, meaning they're sold simultaneously to the same investor group. This allows existing shareholders—including angel investors, founders, and early employees—to achieve partial liquidity while the company raises growth capital.
How It Works
In a traditional fundraising round, the company issues new shares to investors. In a stapled secondary, existing shareholders can simultaneously sell a portion of their holdings to those same new investors. A venture capital firm might invest $50 million in primary shares while also purchasing $10-20 million in secondary shares from early investors. The company receives only the primary capital, while secondary purchasers are buying from departing shareholders at negotiated prices.
The mechanics require careful coordination among legal and financial advisors. Pricing, share allocation, and tax implications must be structured clearly. Many deals include preferred stock in the primary portion and common stock in the secondary portion.
Why It Matters for Investors
Stapled secondaries solve a critical problem for early-stage investors: the long holding periods before exit. Founders and employees often face cash constraints despite holding valuable equity. Rather than waiting for an IPO or acquisition, a stapled secondary offers partial liquidity during growth rounds.
For incoming investors, secondaries provide valuable information about existing shareholder confidence. If founders are selling significant stakes, it may signal concerns. Conversely, minimal secondary activity might indicate strong conviction.
The structure also reduces dilution concerns. When new investors fund growth without existing shareholders selling, ownership stakes are diluted. Stapled secondaries allow some founder/early investor stake preservation while still raising necessary capital.
Example
A Series B round values a SaaS company at $100 million. New investors commit $30 million in primary capital. Simultaneously, three angel investors who hold 8% combined decide to sell half their stakes—roughly $4 million in secondary shares. The company raises $30 million cash; the three angels receive $4 million; the new investors deploy $34 million total. Everyone's ownership structure shifts, but the company's balance sheet strengthens without additional dilution from secondary purchases.
Key Takeaways
- Stapled secondaries bundle founder/early investor share sales with new primary fundraising in one transaction
- They provide partial liquidity for existing shareholders while allowing companies to raise fresh capital
- Secondary activity signals investor confidence levels to incoming investors and markets
- Structure requires careful legal and tax planning to execute properly across all parties