Liquidity is an important consideration in private market investing. The private markets are inherently illiquid for investors, but there can be liquidity opportunities for investors. In this blog, learn more about private market liquidity, secondary sales and tender offers, and some key considerations for investors seeking liquidity.

Private Market Liquidity

Liquidity refers to the ease and speed that an asset can be converted to cash without impacting its intrinsic value. Public investments like those made on the stock market can be bought and sold easily, converting the seller’s shares into cash. On the other hand, shares of private market companies are inherently illiquid. This means that by the very nature of these investments, it can be time consuming and difficult to convert private shares to cash. There are also cases where the market value of the investment can change when an investor attempts to achieve liquidity. But why are private markets so illiquid?

Illiquid Private Markets

Illiquidity is a defining feature of private market investments. There are a few factors that contribute to the inherent illiquidity of private investments.

Absence of a Central Marketplace

Public investments trade on regulated stock exchanges like the New York Stock Exchange (NYSE) or NASDAQ. Private investments don’t have this same centralized public marketplace. These investments aren’t priced daily or have readily available buyers and sellers.

Investor Accreditation Requirements

Additionally, securities law typically restricts the sale of private shares to accredited investors, or those that meet certain financial or knowledge requirements. This limits the pool of potential buyers, and it can be time consuming to find a qualified buyer for secondary private shares.

Transfer Restrictions

Private companies may also impose strict restrictions on the transfer of shares through their bylaws, shareholders’ agreements, and stock options plans. These are designed to help the company control ownership in addition to complying with securities regulations. One common restriction includes the Right of First Refusal, which allows the company or existing shareholders to purchase shares before they are sold to an external third party.

Information Asymmetry

While public companies are required to disclose financial and earning reports, private companies are not required to disclose financial information to the public. This lack of transparency can create an information gap between existing shareholders that may have insider knowledge and potential buyers, which can complicate the valuation and sale process.

Because of the illiquid nature of private market investments, investors should operate under the assumption that they will hold their investment to the point of exit or failure, which could be upwards of 10-15 years, or even longer. This long-term commitment is a risk factor that investors need to weigh before investing in private markets.

So, what liquidity options do private market investors have and what are some key considerations for each method?

Private Market Liquidity Opportunities

Formal liquidity events, planned by either the company or enabled by specialized platforms, may be able to provide controlled opportunities for early investors and employees to sell shares in private companies. These mechanisms are designed to balance the liquidity needs of shareholders while also ensuring the company can manage its cap table and avoid disruptive, uncontrolled trading.

Secondary Sales

A secondary sale occurs when an existing shareholder sells their stake in a private company to a new, qualified investor. This transaction occurs on the “secondary market”, which is distinct from when the company first issues the shares to its original investors. Secondary sales can be facilitated by specialized brokerage platforms like MicroVentures.

The process typically involves significant due diligence on the company, verification of share ownership, and adherence to the company’s transfer restrictions like Rights of First Refusal.

Tender Offers

A tender offer is a company-led liquidity event where the company itself, or major investors acting on behalf of the company, offers to purchase shares from existing shareholders, most commonly early employees. Tender offers are typically structured, controlled processes that can provide liquidity to a broad group of investors simultaneously.

• Company-Led Tender Offers – A company may use its own cash reserves or raise dedicated capital to fund a tender offer. This is often done to allow long-term employees to monetize a portion of their equity, which can help boost morale and retention.
• Investor-Led Tender Offers – A large institutional investor, such as a private equity or venture capital firm, may offer to purchase shares from other shareholders. This can allow the lead investor to increase its stake while providing liquidity to early investors or employees.

Tender offers are generally viewed as a positive signal, indicating that the company or its lead investors are confident in its current valuation and future prospects. They can provide a centralized and efficient way to create liquidity for many shareholders at once.

Considerations and Limitations

While these liquidity windows can sound promising to investors seeking liquidity, there are some key considerations.

No Guarantee

The availability of these exit windows is not guaranteed for an investor or employee. Liquidity events happen few and far between, so investors should not rely on achieving liquidity through their private market investments. Investors should be prepared to hold on to their investment until the point of IPO, merger, acquisition, other exit, or company failure.

Valuation and Pricing

Shares sold on the secondary market or in a tender offer may be offered at a discount or premium to the company’s most recent valuation. Investments may not be able to command the same value, and investors may not be able to recoup their original investment. Pricing of secondary shares depends on current market conditions, the company’s performance since its last valuation event, and the size of the transaction.

Company Approval and ROFR

Most investment documents will have specific transfer restrictions like a Right of First Refusal. While in the case of an investor selling private shares on the secondary market, a company exercising its Right of First Refusal can still allow the transaction to go through, but it could delay the timing, influence expected sales price, and impact any potential buyers of secondary shares.

Transaction Costs

Facilitating a secondary transaction does involve fees, which may include commissions for brokerage services in addition to potential legal or transfer fees.

Final Thoughts

While investors should not be solely focused on liquidity options for their private market investments due to the inherently illiquid nature of private securities, there are some options to achieve liquidity in advance of an IPO, merger, or acquisition. Secondary sales and tender offers may help provide liquidity for early investors and employees but comes with key considerations and should not be relied upon.

Are you looking to sell shares on the secondary market? Fill out on the form on our website to learn more!

Are you ready to invest in startups? Sign up for a MicroVentures account to start investing!

Want to learn more about investing in startups? Check out the following MicroVentures blogs to learn more:

• Assessing Startup Financial Health
• Going Digital: The Rise of HealthTech
• Using Alternative Data to Assess Startups
• Startup Consolidation: The Rise of M&A in 2025

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.