Employee Liquidity & Secondaries
How to unlock cash for your team without destroying your 409A valuation.
The 2025 playbook for tender offers.
The "Liquidity Trap"
Your early employees are paper-rich but cash-poor. They want to sell stock to buy houses or pay for weddings. You want to help them.
But here is the trap: If you let them sell stock at a high price, the IRS assumes ALL your stock is worth that high price.
A single, unstructured secondary sale can skyrocket your 409A valuation overnight, making stock options expensive for new hires and creating a massive tax bill for everyone.
The Nightmare Scenario
Employee sells common stock to a VC for $10.00/share.
Result: Your 409A (Strike Price) jumps from $2.00 to $10.00.
Impact: You can no longer issue cheap options to new engineers. Recruiting stalls.
The Structured Approach
Company runs a formal Tender Offer at $10.00/share.
Result: Your 409A stays at $2.00 (or moves slightly to $2.50).
Impact: Employees get cash. New hires still get cheap options. Everyone wins.
The 3 Mechanics of Liquidity
Not all secondary sales are created equal. Choose your structure carefully.
1. Ad-Hoc Secondary
A founder or early employee finds a buyer and sells privately. The company approves the transfer.
The IRS views this price as "Fair Market Value" unless proven otherwise.
2. Tender Offer (Buyback)
The company uses its own balance sheet cash to buy back shares from a broad group of employees.
Great for control, but drains your runway. Often done after a fresh funding round.
3. Third-Party Tender
An investor (new or existing) offers to buy shares from employees. The company organizes the process.
Preserves company cash. Can be structured to protect 409A.
How to Protect Your 409A Valuation
To convince auditors that the Secondary Price (e.g., $10) is NOT the Fair Market Value (e.g., $2), you must separate the transaction from the "stock value."
Information Asymmetry
Buyers (investors) have full access to financials and board decks. Sellers (employees) do not. This proves the transaction isn't a "perfect market," allowing you to discount the price for 409A purposes.
Restrictions on Sellers
Limit who can sell (e.g., tenure > 2 years) and how much (e.g., max 20% of holdings). This shows the transaction is a "one-time benefit," not a market price.
Preferred vs. Common
Investors are buying Common Stock but often paying the Preferred Stock price. This premium is for "strategic access" to the cap table, not the intrinsic value of the common stock.
Get a "Secondary Opinion"
Don't guess. Hire a valuation firm (like QuantVal) to write a memo justifying why the secondary price should be excluded from the 409A analysis.
2025 Secondary Market Trends
The "Secondary Discount"
In 2021, secondaries often traded at the same price as the Preferred round (0% discount).
In 2025, secondary common stock typically trades at a 30% - 45% discount to the latest Preferred price. Investors are demanding a margin of safety.
Structured Liquidity Programs
Companies are moving away from one-off deals. The trend is Annual Recurring Tenders.
Example: "Every November, employees vested >3 years can sell up to 10% of their vested options." This predictability helps retention more than random windfalls.
Frequently Asked Questions
Planning a Tender Offer?
Don't let a liquidity event become a compliance disaster. QuantPillar can model the 409A impact before you sign the deal.