7 questions HR should consider before organising a secondary sale for employees

1. Who Can Participate?  

Determining the eligible participants is the cornerstone of any secondary sale. Are current employees the sole beneficiaries, or should ex-employees and other stakeholders be considered? Defining participant criteria sets the stage for a fair and inclusive process.

Things to keep in mind:

The eligibility criteria will have a significant impact on how participants perceive the secondary sale. Employees who feel included and fairly treated are more likely to have a positive view of the process and the company as a whole. Conversely, excluding certain groups may lead to feelings of resentment and dissatisfaction. Remember, both employees and ex-employees are ambassadors of your company.

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Excluding part-time employees or employees in specific geographic locations, may unintentionally perpetuate inequities within the organization. Strive to create a process that is accessible to all option and shareholders.

2. What is the maximum percentage of options that can be sold? 

Determining the maximum percentage allowance for the sale of options/shares involves balancing the number of employees with vested options/shares and the demand from potential investors. While organizing the sale, the final supply of shares remains uncertain, making the determination of the optimal percentage more of an art than a science. However, just to give an idea, the most common range is 10-20%.

Things to keep in mind:

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Scenario Planning: Conducting analysis based on different percentage allowance scenarios can provide valuable insights into potential outcomes. By simulating various scenarios, such as different percentage allowances for the sale, HR can assess the impact on employee ownership, investor interest, and market dynamics. This data-driven approach enables informed decision-making and minimizes the risk of unforeseen consequences.

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Retention of Key Employees: Setting the maximum percentage allowance too high may lead to a sudden windfall for employees, particularly key personnel with substantial company ownership. This could incentivize them to cash out and leave the company. Balancing the desire to provide liquidity for employees with the need to retain talent is essential for long-term organizational stability.

3. Is the maximum percentage that can be sold from ‘all-time vested options’ or from ’vested options that remain unsold’?

This is not a deep philosophical question, rather a detail that needs to be decided and well communicated before the sale starts.

If the company has had previous sale opportunities, then participants can either presume that the maximum % they can sell applies to their unsold options or that the calculations are from total options vested.

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E.g. Elizabeth was granted 1000 options when she joined the company, 500 of them had vested once she left. In a previous sale she had been able to sell 20% of all vested options, meaning she has already sold 100. Now a new sale is coming up and she has 400 vested options left. The new sale allows her to sell 10%, but should the 10% be calculated from 500 options or 400 options? That needs to be decided and communicated by the company.

4. Which locations (employee tax residences) can participate?

Ideally, all company option holders and shareholders would be able to participate, regardless of their geographic location.

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However, sometimes countries and their tax residents or citizens will have sanctions placed upon them, and it will be the company’s responsibility to make sure those sanctions are correctly followed.

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It is also possible that some of your office locations cannot participate simply because the employees are so new that there is no one with vested options.

5. Which teams in the company will need to be included in organising the secondary sale?

Organizing a secondary sale involves coordination across various teams within the company to ensure a seamless and successful process. Including the right teams from the get go facilitates effective decision-making, regulatory compliance, and employee engagement.

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List of possible teams to involve: 

• Executive leadership
• Human resources
• Legal/tax 
• Accounting/finance 
• Public Relations
• IT and data security

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6. When to let participants know that there will be a secondary sale?

Determining the appropriate timing to inform participants about the upcoming secondary sale is crucial for maintaining transparency, managing expectations, and ensuring a smooth and orderly process. Balancing transparency with confidentiality is essential to minimize market speculation and maintain employee trust.

Communication of a secondary deal happens in steps and should be planned ahead.

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Things to keep in mind:

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Recognize that ex-employees may still have connections within the company, making it unrealistic to expect information to remain confidential once it starts circulating within the company. Given this, it's important to consider the potential for information leakage when determining the communication plan.

7. What external assistance will your company need? 

The biggest external help for any secondary sale will be legal and tax advice, especially if the company has participants in a lot of jurisdictions. 

However, other areas where help might be needed are 

• Brokers - to help find investors
• Administrative - analysing and correcting data; proofreading texts
• Tools and platforms - e.g. docusign or a secondary sale platform
• Customer support functions - a team to answer participants’ questions and help them through the steps in the process

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Things to keep in mind:

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Cost Considerations: While securing extra help is essential for the success of the secondary sale, it's important to weigh the costs against the anticipated benefits and budgetary constraints.

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HRs are heavily involved in running a secondary deal. And it is not an easy process - there are many stakeholders involved, and commonly the process is far from linear, changing on the go. Yet the benefits of closing such a deal far outweigh the costs. Employees reap the well-earned rewards, have a chance to change their lives for the better and become really strong brand ambassadors. Very few tools in HR can achieve such results.

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