The Downside of Secondaries: How Secondary Transactions Impact 409A Valuations and Employee Equity Grants

Secondary transactions in pre-IPO companies have surged to 71% of VC exit dollars in 2024, but they create a hidden cost for employees by artificially inflating 409A valuations of common stock, thereby increasing exercise prices for future equity grants. The article explains how secondary sales, while providing liquidity for sellers, systematically reduce the upside potential for new hires and existing employees receiving new option grants by narrowing the discount between preferred and common stock valuations.