Why do you care if shares sold are primary?

Because it helps me follow the money! Long-time readers know how important the distinction between primary and secondary shares can be for something like an IPO or a strategic investment, but for new readers or for those who are new to investing and reading financial disclosures maybe a little explanation is in order.

> “Primary” definition:  Primary shares are “new” shares that are issued by the company out of its authorized capital stock. The money paid by investors for primary shares will go to the company. A primary share sale increases the company’s outstanding shares.

> “Secondary” definition:  Secondary shares are “used” shares that are held by an investor.

The money paid by investors for secondary shares will go to the shareholder(s) selling the shares, not to the company. A secondary share sale doesn’t change the company’s outstanding shares.

> Cash-out vs cash-in:  A primary sale (generally) monetizes the company’s valuation to raise more cash that the company can use. New cash comes into the company that it can put toward paying down debt, building new facilities, or launching new products.

A secondary sale (generally) is just a market transaction that doesn’t alter the company’s business in any way. A secondary sale might alter the governance of a company by changing the configuration of the company’s board of directors, but it doesn’t have any impact on the company’s financial statements. 

> So why is primary so good?  In an IPO, I use the sale of primary shares as a signal of potential growth. If the company is selling a large portion (>25%) of secondary shares it makes me question the future growth potential of the company if existing shareholders are so willing to exit at this price.

Of course, we cannot enter into the minds of those selling shareholders to know their true motivations for selling, but I don’t give selling shareholders the benefit of the doubt. At the end of the day, if I’m taking the enormous risk that comes with buying IPO shares, I want to know that my money will be put to work to make more money for me and my fellow shareholders in the future. I’m not usually interested in providing a parent company with an easy exit or buying an