Secondary pricing and tax

Preferred stock in a priced round has rights (prefs, boards) that common lacks. Secondary sales of common (what employees usually hold after exercise) are often priced at the last preferred primary price (common in sponsored tenders tied to a round), at a discount to preferred (lack of preferences and illiquidity), or rarely at a premium when scarcity and hype dominate.

Separately, the company maintains a 409A valuation — an independent appraisal of fair market value (FMV) of common stock used to set option strike prices. A tender or secondary at a price far above the latest 409A can pressure the company to update 409A sooner, raising strikes for future grants. Boards manage this carefully; it is one reason companies police informal secondaries.

Nothing here is tax advice; outcomes depend on your facts and jurisdiction.

Walking through a $24 tender

Last preferred round: $30/share post-money primary. Latest 409A FMV for common: $12/share. Company tender for employees at $24/share (20% discount to preferred). You sell 5,000 exercised common shares:

Gross proceeds = 5,000 × 24 = $120,000
Cost basis     = $12,000  (exercised years ago at $2.40)
Gain           ≈ $108,000 before tax

Character depends on holding period and share type (ISO vs NSO stock, QSBS eligibility, etc.).

Mechanisms to know:

1. Capital gain vs ordinary income. Sale of shares you hold generally produces capital gain or loss: sale price minus basis. US long-term vs short-term typically depends on holding period after exercise (usually >1 year for long-term rates).
2. ISOs and disqualifying dispositions. Sell ISO shares too soon after grant/exercise and preferential ISO treatment can unwind into ordinary income — see equity taxes.
3. NSO shares. Basis usually includes amount already taxed at exercise; sale gain is capital.
4. QSBS (Section 1202). Can exclude a large fraction of gain if holding period and issuer tests are met. A secondary can be a QSBS exit — or can complicate remaining lots. Confirm with a tax advisor before tendering if QSBS matters.
5. Withholding. Employee tenders sometimes withhold; founders' negotiated secondaries often do not — you may owe estimated payments.
6. AMT. Large ISO exercises in prior years interact badly with later sales.

A practical checklist: cap and proration; price vs last round vs 409A; rough after-tax proceeds, not gross; concentration remaining in this single stock; MNPI / insider constraints; whether you will still care about the company on Monday.

Common mistakes

• Using last preferred price as your common FMV. 409A is often much lower; tenders may sit in between.
• Planning on QSBS exclusion without checking lots and holding period.
• Ignoring estimated tax on a founder secondary with no withholding.

Check yourself

Preferred last round $30, 409A $12, tender $24. You sell exercised common. Which price is your sale price?

$24 — the tender price. 409A set your old strike; preferred is a different security.

Why can a tender far above 409A matter to people who are not selling?

It can pressure a 409A update and raise strike prices on future grants.

Key takeaways

• Common secondaries often sit at or below last preferred; 409A is a separate FMV used for strikes.
• Tax character depends on holding period, option type, and possible QSBS — model before you sell.
• Large gaps between tender price and 409A have governance consequences for future grants.

Further learning

The Holloway Guide to Equity CompensationStock options, RSUs, job offers, and taxes—a detailed reference, including hundreds of resources, explained from the ground up, for both employees and managers.Holloway

Hub: secondaries.