Companies are staying private longer, and employee liquidity programs — company-sponsored tender offers and secondary sales between shareholders and outside investors — have become a routine part of the venture landscape. These transactions are now among the most scrutinized inputs in a common stock valuation.

Why they matter. The Section 409A regulations require a valuation method that considers all available information material to the company’s value. ASC 820 and ASC 718 require consideration of observable transactions in the company’s own securities. A secondary sale of common stock is often the most direct market evidence available, but it is rarely an orderly transaction between fully informed parties, so it cannot simply be adopted as value.

Factors we weigh:

  • Volume: shares sold relative to fully diluted capitalization and to the common float.
  • Participants: whether buyers were existing investors, new investors, or the company itself, and whether they had access to the same information as a typical market participant.
  • Motivation: whether a buyer paid a premium to gain board representation, information rights, or a strategic position.
  • Structure: company-sponsored tender versus unsolicited trades, and the effect of rights of first refusal and transfer restrictions.
  • Timing: proximity to the valuation date and to any priced financing round.
  • Security: whether the shares traded were common or preferred, and the rights attached to them.

Compensation element. When a company or its investors buy shares from employees at a price above fair value, the excess may need to be recognized as compensation cost under ASC 718. Identifying and supporting this amount is part of the analysis.

FMV versus fair value. Section 409A uses fair market value; ASC 718 uses fair value. The two standards usually converge, but the weight given to secondary transactions can differ between them. Some companies now obtain separate analyses for each purpose.

Practical steps. Notify your valuation provider before launching a tender offer. A significant secondary transaction is generally a material event that warrants a refreshed 409A valuation. Relying on a pre-tender valuation risks losing safe-harbor protection.

Capto Advisors prepares 409A and ASC 718 valuations using OPM, PWERM, and hybrid methods, with documented analysis of secondary market evidence.