Pre-IPO Secondary Sales: Why Some Founders Take Money Off the Table

Pre-IPO secondary sales — where founders sell a portion of their shares to new investors before the IPO — have become increasingly common in Asia. The rationale is straightforward: founders who have been illiquid for a decade want partial liquidity before the IPO lockup (which adds a further 6-12 months of illiquidity post-listing). The optics are more complex. Institutional investors in the IPO will scrutinise the size of the secondary sale: selling up to 5-10% of founder holdings is generally viewed as prudent personal financial planning; selling more than 20% is viewed as a red flag — ‘if the founders are cashing out this much before the IPO, what do they know that we don’t?’ HKEX and the SFC also review pre-IPO secondary sales: if the sale price is significantly below the expected IPO price range, it creates a valuation anchor that complicates pricing; if the sale involves undisclosed side arrangements with the buyers, it raises regulatory concerns. Best practice: disclose the secondary sale in the prospectus, explain the founder’s rationale honestly (‘personal financial diversification after 12 years of illiquidity’), and keep the percentage modest.