I actually studied finance at a respected uni, and PE transactions and fund structures were hardly even touched on in the curriculum. Much of my recent learning has come from pages like yours and Investopedia.
This is great! So informative — reaching beyond the headlines to get to the underlying things the press essentially NEVER covers.
One important nuance — whether the funders of the secondaries are getting preferred stock issued by the company - and therefore subject to a higher valuation. This would be a mitigating factor on the need to increase the 409A valuation — because of the preferred rights (and preference stack rights).
I’m not too sure what “market” is right now for these types of deals. Are companies like Stripe and Anthropic doing their employees a favor by stepping in between the trade to grant that structure? How much structure or rights? Of course, the firm doing those 409A valuations arguably shouldn’t value those rights that highly — given how strong these companies are. But at the same time there’s a lot of pressure from the boards to keep those 409A valuations as low as possible for all the reasons you stipulate. And they’ll grab on to any excuse they can to satisfy their customer! 🤪
Yeah, it’s a good callout that I considered covering but thought it might be too much :). If they are preferred then there is a stronger argument not to weight them as much and discount to common can still be high.
A lot of those direct secondaries are done with common unfortunately tho so weighting is high
But there are certainly things companies can do to mitigate the impact more as you mention!
hmm this is a bit confusing to follow. my understanding is that this only impacts RSUs if your expected grant size decreases upon the company receiving a higher 409A, to target a similar $ amount of TC. if you are making that argument, then you could also argue that your executive friend's grant (in number of options) actually increased upon the company receiving a higher 409A for the same reason (e.g he would have received a smaller grant if the strike was $1.50)
This is super informative. Thanks for sharing.
Important to look at the negatives too :)
I actually studied finance at a respected uni, and PE transactions and fund structures were hardly even touched on in the curriculum. Much of my recent learning has come from pages like yours and Investopedia.
Glad it has been valuable! Let me know if there are other topics you would like to see covered as well
In most cases aren’t hot/larger companies that have a high volume of secondaries, issuing RSUs at that point? Or do some still prefer issuing options?
This is great! So informative — reaching beyond the headlines to get to the underlying things the press essentially NEVER covers.
One important nuance — whether the funders of the secondaries are getting preferred stock issued by the company - and therefore subject to a higher valuation. This would be a mitigating factor on the need to increase the 409A valuation — because of the preferred rights (and preference stack rights).
I’m not too sure what “market” is right now for these types of deals. Are companies like Stripe and Anthropic doing their employees a favor by stepping in between the trade to grant that structure? How much structure or rights? Of course, the firm doing those 409A valuations arguably shouldn’t value those rights that highly — given how strong these companies are. But at the same time there’s a lot of pressure from the boards to keep those 409A valuations as low as possible for all the reasons you stipulate. And they’ll grab on to any excuse they can to satisfy their customer! 🤪
Yeah, it’s a good callout that I considered covering but thought it might be too much :). If they are preferred then there is a stronger argument not to weight them as much and discount to common can still be high.
A lot of those direct secondaries are done with common unfortunately tho so weighting is high
But there are certainly things companies can do to mitigate the impact more as you mention!
Yeah… my mind always goes to those “too much” cases!
Interesting G2 that these deals are mostly getting done with Common Stock. I’d love to see the stats on that.
same impact on RSUs.
hmm this is a bit confusing to follow. my understanding is that this only impacts RSUs if your expected grant size decreases upon the company receiving a higher 409A, to target a similar $ amount of TC. if you are making that argument, then you could also argue that your executive friend's grant (in number of options) actually increased upon the company receiving a higher 409A for the same reason (e.g he would have received a smaller grant if the strike was $1.50)