Most employees approach a secondary offer by asking whether the buyer's price sounds fair. The better frame is to understand your equity and its market first. Suppose you have spent four years at a private company, your equity is vested, the company has raised several rounds of funding, and no IPO is visible on the horizon. An inbound secondary buyer wants your shares. Before replying, consider five issues. You need not be a finance professional, but each can affect whether the transaction makes sense and whether its terms are reasonable.
1. Know your share class first
Private-company equity does not all carry the same rights. Common shares, converted restricted stock units, and exercised stock options result in common shares at the bottom of the capital structure. Preferred shares, typically issued to institutional investors in funding rounds, have rights common shares lack: liquidation preferences, anti-dilution protections, and sometimes participation rights. Those rights can let preferred holders receive both their stated preference and a pro-rata share of the remaining proceeds.
As a common-equity holder, your outcome in an exit comes after the preferred liquidation preference stack is paid. That stack can be substantial when a company has completed multiple funding rounds. If it has raised $300 million across three preferred rounds and exits for $400 million, common shareholders collectively receive only the $100 million left after the preference stack is cleared, rather than a proportional share of the full $400 million. Before assessing a secondary offer, you need to know what sits above you in the capital structure. That is essential to judging whether the offered price is reasonable.
2. The 409A value is not the secondary price
Most employees know their company's latest 409A common share fair market value because it establishes the strike price for option grants. Many then treat that figure as the secondary-market value of their shares. That inference is often wrong in either direction.
A 409A valuation is a compliance exercise that produces a defensible common share fair market value for IRS purposes through methodologies intended to be auditable and conservative. It is not meant to forecast secondary market clearing prices. Secondary buyers set bids using current signals, including comparable-company secondary trades, buyer appetite, and expected exit timelines. In favorable conditions, attractive companies may command secondary prices above 409A values as buyers anticipate near-term exits. In tight conditions, prices may fall below 409A values as buyers account for longer holding periods and compressed exit multiples. This does not mean the 409A is useless. It means the 409A informs you about your shares, not what a buyer will pay today.
3. Your shareholder agreement controls your options
Each employee equity grant is governed by a shareholder agreement or similar document that sets transfer conditions. The key provision is usually the right of first refusal. Most agreements require you to notify the company and give existing investors the chance to match a secondary buyer's price before transferring shares to a third party. This ROFR process creates time and uncertainty, typically taking 10 to 30 days depending on the agreement.
Some agreements also require board approval, limit sales to particular buyer categories, or impose lockup periods after a recent funding round. Review the agreement and consult an attorney who focuses on employee equity before contacting a buyer. Its terms may limit your choices in ways the grant documentation does not make obvious.
4. Taxes turn on equity type and holding period
Tax results differ depending on whether you hold ISO stock options, NSO stock options, restricted stock, or RSUs, as well as how long you have held the underlying shares. ISOs exercised and held for at least one year from exercise and at least two years from grant date qualify for long-term capital gains treatment on the spread between exercise price and sale price. NSOs create ordinary income on exercise, followed by capital gains treatment on later appreciation.
A secondary sale producing a large ordinary income event may be much less attractive than one receiving long-term capital gains treatment. Run this analysis before committing. The timing of exercise compared with the anticipated secondary sale, and the tax treatment that follows, is among the most consequential choices in employee equity liquidity planning. Given the amount at stake, consulting a tax advisor specializing in employee equity is well worth the cost.
5. Establish an independent price reference first
In first-time secondary transactions, sellers commonly receive a buyer's bid and only then ask whether it is fair. Establishing an independent price reference before negotiations is stronger. The seller-first approach favors the buyer.
A buyer's indicative bid reflects its return requirements, views on exit timing and probability, and deal-pipeline competition. It could be fair, or 60 cents on the dollar for a position the buyer believes is worth more. An employee selling shares in a private software company cannot tell which applies without an independent secondary market price estimate.
An independent price reference changes the conversation before you engage a buyer. It provides a floor for reviewing bids, support for challenging an offer below current market levels, and confidence to walk away when no buyer reaches a reasonable threshold. That is the purpose for which Earlyasset's pricing reports are built.
Important: AI outputs are informational tools only, not investment advice or formal appraisals. Private-market risks include illiquidity and loss of capital. Consult qualified financial and legal advisors before transaction decisions.