Twelve months can pass between 409A updates. The per-share figure in your option grant documents may look like a useful guide to what your equity is worth, but it is not one in the way many employees assume. A 409A value and a secondary market clearing price for common shares come from different processes and serve different purposes, so they can diverge in either direction. Knowing why matters before reviewing a tender offer or approaching a secondary buyer.
What a 409A valuation is for
A 409A valuation is a third-party appraisal required by Section 409A of the Internal Revenue Code. Private companies granting stock options must set the exercise price at or above the fair market value of the underlying common shares when granted. Without a defensible fair market value, those options could be treated under IRS rules as deferred compensation subject to immediate taxation and penalties.
409A is about compliance, not measuring the market. A credentialed appraiser applies IRS-recognized methodologies to produce a figure that can withstand an audit. The assignment is not to forecast what a secondary buyer would pay today. It is to support a valuation that limits the company's tax compliance risk while establishing the lowest defensible price for common shares.
Why 409A methodology stays conservative
Two standard features of 409A methodology consistently move common share value toward the conservative side of the range.
The first is the liquidation preference discount. The Option Pricing Method, the most common 409A approach, treats company equity as options with exercise prices set at each liquidation preference threshold. Common shares become a call option on the residual value remaining after all liquidation preferences are paid. Where the cumulative preference stack is large, the discount can be substantial. The appraiser must apply it rigorously, with no reason to take an aggressive upside position.
The second is the lack of marketability discount. 409A explicitly reduces value because private company common shares lack a liquid market. Depending on the company's stage and the appraiser's methodology, that discount typically ranges from 15 to 30 percent. A secondary buyer has already accounted for illiquidity through the return they require. The 409A adjustment is separate: it reflects accounting, legal, and compliance considerations rather than the calculation a market participant would use.
When secondary prices top 409A values
When conditions are favorable, buyers may pay above the 409A common share value for an attractive company. Buyer competition, optimism about near-term exit timing, or faster growth since the last 409A can produce that result. Since 409A values are usually updated annually, the current figure may describe the company from 9 to 12 months earlier. An employee at a private software company whose revenue has grown significantly or reached a new funding milestone may receive a secondary bid well above that stale figure. This does not mean the 409A was wrong. It means the buyer is pricing newer information.
The pattern was especially clear during 2020 and 2021. For sought-after late-stage companies, secondary prices often exceeded 409A common share values by significant margins because buyers anticipated near-term IPOs at elevated public market multiples. Sellers treating 409A as a floor often discovered they could negotiate materially higher prices.
When secondary prices trail 409A values
When markets contract, secondary prices can rationally move below 409A values. The earlier 409A may have assumed stronger exit multiples and timing. Current buyers update those assumptions using public market comparables, allow for longer holding periods, and may demand higher returns because uncertainty has increased. A 409A figure set in better conditions does not automatically reset when the market shifts.
The period from 2022 through 2024 made this clear. Secondary buyers frequently offered less than prior 409A values for private company common shares, reflecting lower public market software multiples and longer expected IPO timelines. Sellers using 409A as their benchmark found the bids disappointing. Those who recognized that pricing had adjusted to current conditions could judge the offers on their actual merits instead of an outdated reference.
Using both figures properly
The 409A figure and the secondary price do not compete with each other. They answer separate questions and serve separate purposes. 409A is the IRS-compliant fair market value used for option pricing and tax planning. The secondary price is what a buyer will pay for common shares today. When deciding whether to transact, the secondary price is the number that matters operationally.
For an employee considering a secondary sale, the key question is not whether the bid sits above or below 409A. It is whether the offer matches current clearing prices for comparable positions in comparable companies. An independent estimate of the secondary market price, obtained before reviewing a buyer's bid, provides a more precise reference point than guesswork alone.
Important: This article is informational only. AI outputs are informational tools, not investment advice or formal appraisals. Private transactions carry risks, including illiquidity and loss of capital. Option exercises and secondary sales may receive different tax treatment by jurisdiction and circumstance. Consult qualified financial and legal advisors before making transaction decisions.