What Is a Secondary Transaction?
In venture finance, a primary transaction is when a company sells new shares to investors to raise capital — the proceeds go to the company's balance sheet. A secondary transaction is when existing shareholders sell their shares to buyers — the proceeds go to the selling shareholder, not the company. The company's cap table changes (ownership shifts from seller to buyer) but no new cash enters the company.
Secondary transactions take several forms:
- Founder or employee liquidity: Early team members sell a portion of their shares to provide personal liquidity, often facilitated by the company
- Investor secondary: An early-stage fund sells their position to a secondary fund (e.g., Forge, Nasdaq Private Market)
- Company-facilitated tender offer: The company formally organises a process for shareholders to sell to new buyers at a set price
- Structured liquidity programs: Regular secondary windows for employee liquidity, often at late-stage companies
Why Secondary Prices Matter for Your 409A
When an arm's-length secondary transaction occurs at a known price, that price is market evidence of FMV — and both 409A appraisers and financial statement auditors treat it as a meaningful data point. The key question is: how does the secondary price compare to your current 409A?
- Secondary consistent with 409A: No problem. Confirms that the 409A is reasonable.
- Secondary significantly above 409A: Creates tension. Auditors will ask why the 409A common stock FMV is lower than what market participants just paid. The appraiser must explain the difference (typically: preferred rights that buyers received, or the buyer is paying a control premium).
- Secondary significantly below 409A: Creates the opposite tension. May suggest the 409A is too high.
Preferred Secondary vs. Common Secondary: A Critical Distinction
Most secondary transactions involve preferred shares — investors selling their preferred stock to secondary buyers. These prices are not directly comparable to the 409A common stock FMV:
- Preferred shares carry liquidation preferences, anti-dilution rights, and other protections that common stock does not have
- A preferred secondary price must be adjusted through the OPM to infer the implied common stock value
- Buying preferred at a secondary price does not mean common stock is worth the same amount per share
When common shares are sold in a secondary (less common but possible at late stage), the price is a direct comparable to the 409A common FMV and will be scrutinised closely.
Tender Offers and 409A
A company-facilitated tender offer sets a specific price at which the company (or a third-party buyer) offers to purchase shares from willing employees and shareholders. This price has significant 409A implications:
- The tender price must be consistent with the current 409A FMV for common stock
- If the tender price is significantly above the current 409A common FMV, the company should obtain a new (or updated) 409A that incorporates the tender price as evidence of FMV
- Failing to update the 409A after a tender offer at a higher price can create a disconnect that exposes the company to IRS and auditor challenges on options granted at the lower old FMV
Is a Secondary Transaction a Material Event?
Whether a secondary transaction triggers a required 409A refresh depends on its nature:
| Transaction Type | Material Event? | Action Required |
|---|---|---|
| Investor-to-investor preferred secondary (no company involvement) | Generally no | No immediate 409A required, but note for next scheduled refresh |
| Company-facilitated tender offer at current 409A price | No | No action if consistent with existing 409A |
| Company-facilitated tender at price significantly above 409A | Yes | Commission new 409A before next option grants |
| Common stock secondary at price above current 409A FMV | Yes | Commission new 409A incorporating secondary data |