Every startup employee has seen this situation: your company announces a massive new funding round. Your Carta dashboard updates to show a new 409A valuation. You multiply your shares by the new number. The result looks great. But when you hear what secondary market trades are actually happening at, the number is different — often significantly higher.
This is the 409A gap, and understanding it is fundamental to valuing your equity accurately.
Why 409A valuations are conservative by design
A 409A is an independent appraisal of the fair market value of your company's common stock, required by the IRS to determine the legal strike price for new option grants. Independent appraisers have incentives to be conservative for several reasons:
- If the 409A is too high and employees later exercise at that price, the IRS can claim options were granted 'in the money' and assess penalties.
- Appraisers apply discounts for lack of marketability (DLOM) — typically 20-35% — because common shares can't be easily sold.
- Preferred stock (what investors hold) has rights that common stock doesn't — the preferred-to-common discount reflects these preferences.
- 409A updates happen quarterly at best, so they always lag the actual market.
The secondary market price: what investors actually pay
Secondary market prices are set by arm's-length transactions between willing buyers and sellers. Institutional investors bidding on Hiive or Forge are sophisticated and motivated — they're paying what they believe the common shares are worth in the real market. They don't apply DLOM discounts the way a 409A appraiser does (they're pricing in their own exit horizon), and they update their bids in real time as conditions change.
How big is the typical gap?
Historically, secondary market prices trade at a 10–25% premium over common-stock 409A values for well-established companies. For rapidly growing AI companies in 2025–2026, the gap has been wider: Anthropic's secondary prices have been 30–50% above its 409A at various points. OpenAI's secondary prices have tracked closer to its primary round valuation (which itself implicitly resets the 409A).
Using both numbers strategically
Use the 409A for: calculating your exercise cost if you have options, understanding the tax basis for ISO exercises, and benchmarking against prior grant prices. Use the secondary market price for: understanding what your equity could actually be sold for today, modeling your net worth, and evaluating whether a tender offer price is fair.
The key insight: the 409A is the floor, not the ceiling. The secondary market price is closer to the real value — but still not perfect. PrivatePulse's composite valuation method uses the secondary as one of four inputs to give you a defensible range that accounts for all available evidence.