Vanderbilt Law Review

First Page



This Article is the first to explore the emergence of a potentially game-changing third exit option in venture capital: secondary markets for the sale of individual ownership interests in private start-ups and venture capital funds.6 Unlike IPOs and trade sales, secondary markets operate at the individual investor level rather than at the start-up level. Because investors have different liquidity needs, an individual-investor option offers exit to those who need it-for example, to the serial entrepreneur who wishes to start another venture or to the VC whose fund is about to expire and who must return capital to his investors. Secondary buyers who take their place will have a fresh exit clock, a discounted purchase price, and the opportunity to invest in an asset class that was previously unavailable to them and includes some of the world's most promising companies, including Facebook and Twitter. Not only do secondary markets make for more efficient outcomes at the individual-investor level, but they also lead to more efficient outcomes for start-ups, which will no longer be forced into premature, traditional exits to satisfy an individual investor's liquidity needs. Moreover, secondary markets have the potential to solve some of the most vexing problems in venture capital, including the agency costs that can arise between VCs and entrepreneurs-a problem that corporate law has proven ill-equipped to handle.