casemark/modeling-secondary-share-purchases

Modeling Secondary Share Purchases

Structures secondary direct transactions with pricing methodology, transfer restriction analysis, and ROFR navigation.

When To Use

• Pricing founder, employee, or early-investor shares in a direct secondary purchase
• Structuring a company-sponsored tender offer or investor-led secondary block trade
• Evaluating discount-to-last-round pricing and whether implied valuation is defensible
• Navigating ROFR, co-sale, and transfer restriction mechanics before closing a secondary deal
• Benchmarking secondary pricing against 409A valuations, recent primary rounds, or comparable public multiples

Inputs To Gather

• Cap table snapshot: Fully diluted share count, share classes, liquidation preferences, participation rights, and conversion ratios
• Last primary round terms: Price per share, pre/post-money valuation, date, and lead investor
• Most recent 409A valuation: Common stock FMV, valuation date, methodology used (OPM, PWERM, hybrid)
• Transfer restriction documents: Stockholders' agreement, ROFR provisions, co-sale rights, board consent requirements, company bylaws [VERIFY specific restriction language in governing docs]
• Seller details: Share class held, vesting status, holding period, grant date (for tax treatment analysis)
• Company financials: Trailing and projected revenue, EBITDA/burn rate, cash position, runway
• Comparable transaction data: Recent secondary market pricing (e.g., Forge, Nasdaq Private Market), comparable public company multiples

Workflow

1. Map the cap table and waterfall

   • Build a fully diluted cap table including all option pools, warrants, SAFEs, and convertible notes
   • Model the liquidation waterfall at relevant exit values to determine per-share value by class
   • Calculate conversion economics — identify whether preferred converts or takes liquidation preference at target exit ranges

2. Establish pricing methodology

   • Last-round benchmark: Apply discount to last primary round PPS; typical secondary discounts range 10–30% depending on liquidity, information asymmetry, and time since round [VERIFY current market discount ranges]
   • 409A-anchored: Use common stock FMV as floor; assess whether 409A methodology (OPM vs. PWERM) aligns with deal context
   • Comparable multiples: Apply revenue or EBITDA multiples from public comps or recent private transactions to derive enterprise value, then walk down the waterfall to per-share value
   • Blended approach: Weight multiple methods and document rationale for weighting

3. Analyze transfer restrictions and ROFR mechanics

   • Identify whether ROFR is held by the company, existing investors, or both [VERIFY governing document hierarchy]
   • Determine notice period, matching rights timeline, and waiver process
   • Flag co-sale (tag-along) rights that could expand the transaction scope
   • Confirm whether board consent is required and assess likelihood of approval
   • Check for lock-up provisions, market standoff agreements, or contractual holding periods

4. Model transaction scenarios

   • Base case: Agreed PPS at target discount with standard transfer mechanics
   • ROFR exercise case: Company or existing investors match — model impact on buyer allocation
   • Partial fill case: Seller offers X shares but ROFR claws back a portion — model net allocation
   • Tender offer structure: If company-sponsored, model participation caps, proration mechanics, and pricing uniformity requirements

5. Run sensitivity analysis

   • Sensitivity on discount-to-last-round (5% increments across 0–40% range)
   • Sensitivity on exit timing and exit multiple to show IRR and MOIC outcomes
   • Sensitivity on liquidation preference participation — show breakpoints where preferred converts vs. takes preference
   • Scenario table: bull / base / bear with key assumptions for revenue growth, margin trajectory, and exit multiple

6. Assess tax and structural considerations

   • Determine seller's tax treatment: long-term vs. short-term capital gains, QSBS eligibility [VERIFY holding period and Section 1202 requirements]
   • Flag whether transaction triggers Section 409A issues for option holders
   • Note any withholding or reporting obligations for company-facilitated transactions
   • If structuring as a forward contract or SPV wrapper, document rationale and additional complexity

Output

• Pricing summary: Recommended PPS with methodology, discount applied, and implied fully diluted valuation
• Waterfall analysis: Per-share value by class at 3–5 exit scenarios
• Transfer restriction memo: ROFR timeline, consent requirements, and recommended process steps
• Scenario matrix: IRR and MOIC across discount levels and exit assumptions
• Sensitivity tables: Key variable ranges with clearly labeled base case
• Transaction checklist: Required approvals, notice deadlines, and document execution sequence

Quality Checks

• Confirm fully diluted share count ties to the company's official cap table or transfer agent records — do not rely on outdated or partial data
• Verify that liquidation waterfall correctly handles participation caps, carve-outs, and pay-to-play provisions
• Cross-check implied valuation against last primary round, 409A, and public comps — flag outliers exceeding 20% divergence
• Ensure ROFR timeline and notice mechanics match the exact language in governing documents, not summary terms [VERIFY]
• Validate that discount assumptions are supported by observable secondary market data or documented negotiation rationale
• Confirm tax treatment analysis references current IRC provisions and accounts for state-level variations [VERIFY applicable state tax rules]
• Mark any assumption derived from management projections rather than audited financials with [VERIFY]