For founders and executives at venture-backed startups, equity is often the centerpiece of compensation – and the primary driver of long-term wealth. But unlike cash compensation, that equity is typically illiquid for years. Outside of an IPO or a sale of the company, opportunities to turn shares into cash are limited, tightly controlled and often more complex than anticipated. That is especially true when there is no active secondary market.

At a high level, the challenge is straightforward: there is no natural buyer, no established price and no frictionless mechanism to transact. But the real constraints run deeper. Founder liquidity sits at the intersection of contractual restrictions, securities law, internal governance and practical market realities, and each of those layers matters.

Start with the company’s governing documents. In most venture-backed companies, equity is not freely transferable. Rights of first refusal (“ROFR”) give the company and its major investors the right to step in and purchase shares proposed to be sold by a founder or executive to a third party. Co-sale or tag-along rights can further limit how much a founder or executive is actually able to sell, as investors may have the right to participate as sellers pro-rata alongside the initiating seller. Even where those provisions are navigable, companies often retain broad discretion to approve or reject transfers. In practice, this means that a willing buyer and seller are not enough; the transaction must run a formal process and clear multiple internal checkpoints.

Overlaying those contractual constraints is the securities law framework. Because these are private companies, executive sales cannot rely on a public resale mechanism. The safe harbor under Rule 144, which is designed for sales into a public market, is generally beside the point. Instead, transactions must fit within private resale exemptions under the Securities Act of 1933, which in turn determines who the buyer can be (typically an accredited investor) and what information must be shared. Even relatively small transactions therefore require a level of legal structuring and documentation that surprises many first-time sellers.

For founders or executives, there is an additional complication: they are insiders. By definition, they possess material nonpublic information about the company. While insider trading is most commonly associated with public markets, the underlying anti-fraud principles apply just as much in private transactions. Companies are understandably cautious about this. Some impose formal trading windows or require pre-clearance; others effectively prohibit discretionary sales altogether outside of company-organized liquidity events. From the company’s perspective, centralizing the process is the most reliable way to manage disclosure and risk.

Governance considerations reinforce that dynamic. Significant executive sales can raise questions, internally and externally, about alignment and confidence in the company’s trajectory. Boards and lead investors are often sensitive to those optics, and even where they do not have explicit veto rights, they frequently influence outcomes. As a result, executive liquidity tends to be treated less as an individual decision and more as a coordinated corporate event.

Even if all of those hurdles are cleared, there remains a more basic problem: price discovery. Without a public market, there is no obvious reference point. The last preferred financing round is an imperfect proxy, given the economic differences between preferred and common stock. Internal valuations prepared for stock option pricing purposes can provide a baseline, but they rarely dictate actual transaction pricing. Buyers, for their part, typically expect a discount to reflect illiquidity, lack of control and limited information. Sellers, understandably, are reluctant to accept pricing that may signal a lower valuation for the company. It is not uncommon for this gap alone to derail a potential transaction.

The limited pool of potential buyers adds another layer of complexity. In practice, it is relatively narrow: existing investors, a subset of later-stage funds, family offices, and specialized secondary investors. Each of these buyers might have its own diligence expectations and structural preferences, and all must ultimately be acceptable to the company. Finding the right counterparty is therefore not trivial, particularly for one-off transactions.

Given these dynamics, many companies have moved toward structured, company-controlled liquidity programs. Tender offers, periodic secondary windows, or curated processes run through approved intermediaries allow the company to standardize pricing, disclosure and participation. They also provide a way to manage optics and ensure that liquidity is distributed in a manner perceived as fair. For founders and executives, these programs are often the most realistic path to monetization, even if they come with caps on how much can be sold.

Tax considerations further complicate the analysis. The tax treatment of a sale of shares could depend on whether the stock was acquired through option exercise, as restricted stock or otherwise, as well as on holding periods that determine capital gains eligibility. In some cases, poorly structured transactions can undermine favorable tax treatment, including the potential benefits associated with qualified small business stock. The after-tax outcome can differ materially from headline pricing.

Finally, there is the question of signaling. Executive sales are closely watched by employees, investors and prospective investors alike. Even when driven by personal financial planning, they can be interpreted as a negative signal about the company’s prospects. Companies are therefore often deliberate about how and when such transactions occur, and may prefer to bundle them into broader liquidity events to mitigate that risk.

Taken together, these considerations explain why executive secondary sales in private companies are relatively rare outside of organized processes. The issue is not simply the absence of a market; it is the presence of a multilayered system designed intentionally to control how and when liquidity occurs. Founders and executives who are considering a sale are best served by engaging early with the company and its investors, understanding the governing documents in detail, and approaching the process as a coordinated effort rather than a purely bilateral transaction.