A recent study by EY revealed that 85% of secondary transactions in startups were priced similarly to primary rounds, demonstrating that secondary sales are not universally discounted and where discounting did occur, it was in the range of 20%.
Further, the study said that the average discount in secondary transactions during the pandemic (2020-2021) was 18%, slightly lower than the 24% seen in other periods.
“This reflects the high demand for startup investments during the Covid period, with demand-supply stabilising post-pandemic,” Navin Vohra, Partner, valuation, modelling, and economics leader, EY India, said.
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A primary round transaction in a startup refers to when investors buy equities directly from the company that issues them, while in a secondary transaction, investors buy equities from existing shareholders and no fresh stock is issued.
Startups in India are raising funds through a combination of equity and convertible preference shares (CPS) across multiple funding rounds. CPS is a hybrid stock which pays dividends and can be converted to common stock at a fixed conversion ratio after a specified date.
As companies grow and mature, secondary transactions, where existing investors sell their shares, become a common method for liquidity, the EY study said.
EY conducted the research across 600 rounds of funding between January 2019 and June 2024.
Entities with an equity value of Rs 100 crore based on the primary round which raised at least Rs 1 crore in the primary and secondary transactions were considered.
The study also revealed that the discounts were consistent across companies of various valuation sizes, with smaller companies seeing marginally lower discounts.
The discount during the secondary transaction was not affected by the size of the transaction, the quantum of the stake being sold, or if the buyer was the same as in the primary round.
The reasons for minimal discount according to the report could vary like the exit valuation being higher than the total funds raised so far, usually in the case of late-stage startups, or investors having limited control over when they can exit.
Another reason could be a steady rise in valuation which means later investors do not make riskier investments, which in turn lower the risk of down rounds where a startup sells shares at a lower price than a previous round.
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