Your shareholder agreement almost certainly contains transfer restrictions that prohibit you from selling shares without company consent, and may require the company (or investors) to be given the right to purchase your shares first. These restrictions are enforceable, and a sale that violates them may be void.
In my experience, this is the question founders and employees ask when they first start thinking about liquidity, and the answer almost always surprises them. When you received your equity — whether as a founder grant, an ISO option exercise, or restricted stock — you signed shareholder agreement documents that almost certainly contain transfer restrictions. These restrictions are not boilerplate. They are enforceable contractual provisions, and in many cases they are backed by Delaware corporate law (or the law of the state where your company is incorporated) such that a transfer that violates them is not merely a contract breach — it is a void transfer, meaning the buyer gets nothing. The most common restriction is a prohibition on transfer without the company's prior written consent. This gives the company enormous control over who can own its equity. A second category of restriction is the right of first refusal, or ROFR, which I'll cover in the next section. A third category is transfer to restricted parties — many agreements prohibit transfers to competitors, to people on sanctioned lists, or to parties whose ownership would create legal or regulatory complications for the company. I always tell founders and employees: read your shareholder agreement before you do anything else. The transfer restrictions section will tell you exactly what the process needs to look like.
A right of first refusal (ROFR) gives the company — and sometimes investors — the right to purchase your shares at the same price and on the same terms as any offer you receive from a third party. If the company exercises its ROFR, your third-party buyer is out of the deal. If it waives the ROFR, the sale to the third party can proceed.
The ROFR is one of the most misunderstood provisions in startup equity documents, and I've seen it upend secondary transactions that were otherwise well-structured. Here is how it works in practice. Once you find a willing buyer and agree on price and terms, you are required to deliver a ROFR notice to the company — and in many cases to investors as well — setting out the buyer, the price per share, and the other material terms. The company (and investors, in a dual ROFR structure) then has a specified period — typically 30 to 60 days — to decide whether to purchase your shares on those same terms. If the company exercises its ROFR, it steps into the buyer's shoes and purchases the shares at the price you negotiated. Your third-party buyer is out, but you still get paid. If the company waives the ROFR, the sale to your buyer can proceed, subject to any other consent requirements. The ROFR is often used strategically by companies to prevent shareholders from selling to parties the company doesn't want as investors. For hot companies — particularly in AI and technology — ROFR is an important tool for controlling the shareholder base, and I typically advise sellers to have a realistic conversation early in the process about whether the company is likely to exercise or waive the ROFR before they invest time and resources in finding a buyer.
Most shareholder agreements require written company consent before any secondary sale can close, regardless of whether the company exercises its ROFR. Some companies also require board approval, and securities laws may impose additional requirements depending on the number of shareholders and the structure of the transaction.
Even after the ROFR process is satisfied, the sale is typically not complete without the company's affirmative consent to the transfer. This is separate from the ROFR — the ROFR gives the company the right to buy; the consent requirement gives the company the right to approve or reject the third-party buyer even after waiving its own purchase right. In practice, this means the company can block a secondary sale to a buyer it simply doesn't like, even if it isn't willing to purchase the shares itself. I've seen companies block secondary sales to funds they view as activist investors, to potential competitors, and to parties whose ownership would complicate future financing rounds or M&A processes. On the securities law side, the secondary sale of company shares is a securities transaction that needs to fit within an exemption from SEC registration — typically the Section 4(a)(1) exemption for non-issuer, non-dealer resales. The company's cap table management is also relevant: many companies are careful about crossing the 2,000-shareholder threshold that triggers SEC reporting requirements, and they use transfer restrictions and consent requirements to manage it. Secondary platforms like Forge and Hiive are familiar with these mechanics and can help structure transactions that comply, but the company's cooperation is almost always required.
The tax result depends on what type of equity you hold, how long you've held it, and your state of residence. Long-term capital gains treatment requires a holding period of more than one year. If you hold ISOs, there are additional AMT considerations. If you hold shares that qualify for QSBS treatment, the consequences of selling before the five-year mark can be significant.
In my experience, tax planning is the most underweighted part of secondary transactions — founders and employees focus on finding a buyer and navigating the ROFR, and then they realize closing day that the tax result is substantially worse than they expected. The basic framework is this: if you have held your shares for more than one year, your gain is taxed at long-term capital gains rates (currently up to 23.8% for high earners at the federal level, including the net investment income tax). If you have held for one year or less, the gain is taxed as ordinary income — up to 37% at the federal level. Your basis matters enormously: if you made an 83(b) election when you received restricted stock and paid taxes on the value at that time, your basis is the value at grant, which typically results in a smaller taxable gain on sale. If you didn't make an 83(b) election, your basis is the fair market value at vesting, which may be significantly higher and thus may reduce your taxable gain. The 409A FMV of your company's common stock is also relevant — if your secondary transaction establishes a new FMV for the company's common stock, it can affect 409A valuations and the exercise prices of future option grants to employees. Companies are sensitive to this issue, and it is one reason they are reluctant to consent to secondary transactions at prices that dramatically exceed the current 409A valuation.
Qualified Small Business Stock (QSBS) under Section 1202 of the Internal Revenue Code provides a federal capital gains exclusion of up to 100% — but only if you hold the stock for more than five years. Selling before five years forfeits this exclusion entirely. For founders who hold QSBS with significant appreciation, the tax cost of selling early can be millions of dollars.
I typically advise founders with meaningful equity positions to do a QSBS analysis before agreeing to any secondary transaction. The Section 1202 exclusion is one of the most valuable tax benefits available in startup equity — it allows a founder who meets all the requirements to exclude up to 100% of their capital gain from federal income tax (subject to a cap of $10 million or 10 times adjusted basis, whichever is greater). The five-year holding period is an absolute requirement. Selling even one day before the five-year anniversary forfeits the exclusion entirely — there is no partial credit for holding four years and eleven months. This means the decision to sell early is not just a question of current liquidity needs; it is a question of whether the liquidity you receive today is worth the QSBS benefit you are giving up. For a founder with $10 million in QSBS appreciation, selling before five years could cost $2.38 million or more in federal taxes alone that would have been excluded if they had waited. Additionally, California — where many startup founders reside — does not conform to the federal QSBS exclusion, which means California residents owe state tax on the full gain regardless. Founders in high-tax states need to model the full tax picture, including state taxes, before evaluating whether a secondary sale makes economic sense.
The main secondary platforms for pre-IPO equity are Forge Global, Hiive, and Nasdaq Private Market. Each facilitates introductions between buyers and sellers, but they do not guarantee that the company will consent to the transaction. Before listing shares on any platform, sellers should understand what the platform will and won't do for them, and should engage counsel to review the transaction documents.
In my practice, I advise founders and employees who want to pursue a secondary sale to start with three things before engaging any platform. First, read your shareholder agreement and equity plan documents — understand the transfer restrictions, ROFR provisions, and consent requirements that apply to your specific shares. Second, have a preliminary conversation with the company's general counsel or outside counsel about whether the company is open to a secondary sale and, if so, under what conditions. Companies that are receptive to secondary transactions can often facilitate introductions to vetted buyers, or will at minimum indicate the price range they would consent to. Third, understand your tax situation — ideally with a tax advisor who has experience in startup equity — before you agree to any price. Once you've done those three things, secondary platforms are a useful way to access a marketplace of institutional buyers who regularly purchase pre-IPO equity. Forge and Hiive in particular have significant experience with the legal mechanics of secondary transactions and can help structure deals that comply with transfer restriction requirements. The purchase agreement in a secondary transaction should address the ROFR waiver, company consent, representations about the shares being free and clear, and the process for updating the company's cap table. I always review secondary transaction documents for clients, because the representations the seller makes about share ownership, encumbrances, and restrictions are often broad and carry real liability if incorrect.
In my experience, the founders and employees who navigate secondary transactions successfully are the ones who treat it like the legal transaction it is rather than a simple sale. The platform introductions, the company conversations, the tax modeling, and the document review all matter — and skipping any of them tends to produce an outcome that is worse than expected. If you are considering a secondary sale, start with your documents and your tax advisor, not with the platform.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises startups, founders, and investors on SAFE financings, venture capital rounds, mergers and acquisitions, acquihires, and IPOs. He has represented clients in hundreds of transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology. Prior to his career as a corporate lawyer and transaction advisor, he served with the U.S. Department of Justice and as an international and cross-border tax advisor at a Big 4 accounting firm.