When you buy on the secondary market, you are buying shares (or more often, shares of a fund that holds shares) from an existing investor, not from the company itself. This changes the risk profile significantly.
1. The Information Black Box
As a secondary buyer, you have extremely limited visibility into the company’s capitalization table (“cap table”).
- You don’t know: The total number of shares outstanding.
- You don’t know: The size of the employee stock option pool (ESOP).
- You don’t know: What percentage of that pool has already been granted.
Result: You cannot calculate your true ownership percentage or the potential dilution you face. You are buying a “black box” of future dilution.
2. You Are Inherently Buying a “Subordinated” Position
Later-stage investment rounds often include liquidation preferences. Early investors (like the venture capital firms) have preferred shares that get paid back first in an IPO or sale. Your common shares (which is what employees get and what is typically sold on secondary markets) are at the bottom of the stack.
The SBC Impact: The employee option pool is also made up of common shares. When those options exercise at the IPO, they dilute your common shares directly, while the value of the preferred shares is often protected until their preferences are met.
3. The “Dilution Bomb” at IPO
This is the single biggest risk. The dilution from years of SBC hasn’t happened yet; it’s being stored up.
- The company has been promising employees equity without having to show the dilution on its books.
- At the IPO, the S-1 filing will reveal the fully diluted share count. The market’s reaction to this number will determine the IPO price.
- As a secondary buyer, you may have paid a price based on a pre-IPO valuation that does not accurately account for this massive, pending dilution. Your investment could be immediately underwater if the public market values the company on a per-share basis that is much lower than your entry price.
4. Price Discovery is Flawed
The price you pay on a secondary platform is based on the latest funding round’s pre-money valuation. This valuation often:
- Ignores the “overhang” of the unexercised employee options.
- A savvy buyer would value the company on a fully-diluted basis (including all in-the-money options), but the data to do this is not available to you.
Example:
- You buy at a $15 Billion valuation.
- The company has a 15% employee option pool, mostly ungranted.
- At IPO, if all those options are granted and exercised, the fully-diluted valuation effective for new public shareholders might be based on a much larger share count, making the “true” valuation you invested in higher than you thought.
Comparison: Secondary Shareholder in Anthropic vs. Public Shareholder in Credo
| Aspect | Public Shareholder (Credo) | Secondary Shareholder (Anthropic) |
|---|---|---|
| Transparency | High: SBC and dilution are reported quarterly. You see the dilution happening in real-time. | Extremely Low: You have no clear view of the cap table or the size of the SBC liability. |
| Control & Predictability | Some: You can model future dilution based on trends. You can vote (with limited effect) on equity plans. | None: You have zero insight or control over how many options the board grants to employees. |
| The Dilution Event | Gradual and Priced In: The dilution happens steadily and is reflected in the ongoing stock price. | A Single “Bomb”: The full dilution is revealed at once in the S-1, causing a potential major repricing. |
| Liquidity | High: You can sell your shares instantly if you dislike the dilution trend. | Very Low: Your money is locked in until the IPO. You cannot escape if you discover the cap table is messy. |
Conclusion for the Secondary Market Investor
Investing in a pre-IPO company like Anthropic on the secondary market is a massive bet on trust.
- You are trusting that the board is being disciplined with the employee option pool.
- You are trusting that the strike prices for employee options are high enough to not excessively dilute future shareholders.
- You are trusting that the eventual IPO valuation will be high enough to absorb the dilution from SBC and still provide a return on your entry price.
For a public company shareholder, SBC is a visible, quantifiable, and manageable risk. For a secondary market buyer of a private company, SBC is an invisible, unquantifiable risk that could detonate at the most critical moment—the IPO.
This is why secondary market investments in late-stage private companies are considered high-risk, even for “blue-chip” names like Anthropic. The lack of transparency around the cap table and SBC is a primary reason.
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