General Equity Education

409A valuation and lookahead pricing

A 409A valuation sets the fair market value of a private company’s common stock for equity compensation. IRS rules describe reasonable valuation methods and safe harbors for illiquid stock, including independent appraisals within the past 12 months. ^[1][20] Preferred stock sold to investors carries extra rights (liquidation preference, dividends, conversion, and more), so the preferred price is not the same thing as common-stock value for employees.^{[2] [20]}

In hyper growth periods, investor excitement can run ahead of 409A updates. In normal growth periods, the 409A tends to move more steadily and may track closer to the company’s operating reality. If you want to see the extra protections, benefits, and guarantees investors get that impact your common stock, review the investor terms.

Learn how it impacts your equity

To avoid 409A issues, most nonqualified stock options are granted at or above fair market value; discounted options are treated differently under the rules. ^[1] When stock from equity compensation becomes transferable or is no longer subject to a substantial risk of forfeiture, its fair market value is included in income. ^[3] That means a higher 409A can translate into more taxable income at vesting or settlement. ^[3]

For planning, treat the 409A as a baseline, not a guarantee. Your actual payout depends on the exit size, investor preferences, and any dilution between now and liquidity.

Learn how it's used by investors

Preferred stock terms like liquidation preference and participation rights shape how proceeds are split between preferred and common.^{[2] [20]}

Conversion rights can also change the payout waterfall when preferred converts to common.^[2][20]

Liquidation preferences

Liquidation preferences decide how much investors get before common shareholders see any proceeds.^[2][20] In hyper growth outcomes with large exits, preferences may get cleared quickly. In normal growth or smaller exits, the preference stack can absorb most of the proceeds.

Always ask how many times invested capital needs to be returned before common starts participating in the payout.^{[2] [20]}

Participation rights

Participating preferred investors take their liquidation preference first and then share again in the remaining proceeds.^{[2] [20]} This is a bigger drag on common in smaller or moderate exits.

In hyper growth exits, participation can still matter, but it is often less noticeable because the exit pool is larger.

Seniority and stacking

Liquidation preferences can be layered by series, so different rounds may have different multiples and priority in the payout waterfall.^{[2] [20]}

Hyper growth companies can accumulate multiple rounds quickly, so the stack can grow fast. Normal growth companies may raise fewer rounds but still face painful stacks if the exit is modest.

Conversion rights

Preferred shares can convert to common under terms defined in the charter, and investors may choose to convert when it is worth more than taking the preference payout. ^[2][20] That decision changes how much is left for employee equity.

In large exits, investors often convert. In smaller exits, they may stay preferred, which pushes common further down the payout waterfall.

Explore scenarios and how it impacts your equity

Scenario planning helps you see how exit size changes your payout. A small exit may return only the preference stack, a medium exit may partially include common, and a large exit is where common equity starts to look more like headline value.

When you compare hyper growth vs normal growth, the biggest difference is how likely it is to reach the "large exit" scenario that clears preferences and dilution.

Impacts to 409a valuation

Hyper growth can accelerate 409A increases as revenue growth and market comps rise, but the valuation still reflects conservative assumptions and risk discounts.

Normal growth tends to move 409A valuations more gradually. That stability can reduce tax volatility but may also signal slower equity appreciation.

Additional risk factors

Hyper growth adds execution risk, scaling challenges, and higher odds of down rounds or recapitalizations. Normal growth adds timeline risk: it may simply take longer to reach liquidity, which can erode the expected value of equity.

Both paths carry dilution risk, but hyper growth often trades speed for higher dilution while normal growth trades dilution for time.

• Hyper growth example: A company raises four rounds in 3 years and refreshes the option pool twice. A worker starts with 50,000 shares out of 10,000,000 (0.50%). After dilution, the company has 25,000,000 shares, so that worker’s 50,000 shares fall to 0.20%. If the common pool at exit is $1,000,000,000, the per‑share value is $40 and the worker gets about $2,000,000. Without dilution, that same 0.50% would have been $5,000,000. Liquidity comes faster, but the slice is smaller.
• Normal growth example: A company raises two rounds over 7 years and does one option pool refresh. The same worker starts with 50,000 shares out of 10,000,000 (0.50%). After dilution, the company has 20,000,000 shares, so the worker ends at 0.25%. If the common pool at exit is $400,000,000, the per‑share value is $20 and the worker gets about $1,000,000. The dilution is lighter, but the exit takes longer, so the payout is delayed and risk hangs around.

Forward lookahead valuation

A forward lookahead valuation is a fantasy price. It is made up, it is not official, and it is not a standard way to value common stock. When companies lean on it, it is usually hostile to workers because it makes the grant look bigger than it is and hides how small the equity really is.

How it can hide low equity: A company says the “lookahead” price is $50 even though the 409A is $10. They give you 10,000 shares and pitch it as “$500,000 of equity.” At the 409A value, that same grant is closer to $100,000. The higher fantasy price makes the grant feel bigger while your actual ownership is still small.

What happens if hyper growth doesn’t happen: Say the company uses a $50 lookahead price and gives you 10,000 shares. If the company exits at $12 per share, you are not “made whole.” You just get $120,000 and the rest of the fantasy upside never existed. That can leave you worse off than a public‑company job that paid more cash and delivered real equity at market value.

Claw back provisions

Clawbacks and forfeiture clauses are designed to pull equity back to the company. They shrink what you actually receive and make the grant look bigger on paper than it ends up in real life. That extra complexity also makes it harder to value your equity, and it is usually a hostile move toward workers.

Some shareholder agreements also label exits as “good leaver” or “bad leaver,” which can change whether shares are forfeited or bought back at a discount. Good leaver examples often include death, disability, redundancy, or retirement. Bad leaver examples often include breach of contract, gross misconduct, or leaving to compete with the company.^[16]

Employment agreements define what “for cause” means. Definitions often include fraud, theft, willful misconduct, felony convictions, or material breach after notice. ^[17] Read the exact definition in your agreements because it controls whether you keep any equity and how much the company can claw back.

Example: You work 3 years, earn $1,000,000 in equity value, and you are a top-rated performer. Without a clawback, you could receive the full $1,000,000 and pay taxes (for example, 30%), leaving about $700,000 net. With a 25% clawback tied to leaving, $250,000 gets pulled back to the company. Your gross drops to $750,000 and after the same tax rate you keep about $525,000. Same performance, very different outcome.

Liquidity

Tender offers are formal offers to buy a set amount of shares at a fixed price for a limited time. They can be real liquidity windows, but they are usually one-off and capped in size.^{[10] [20]}

Secondary sales can still be blocked or slowed by transfer restrictions and right of first refusal rules. You may have to give notice and let the company (or investors) buy first, or get written consent before any transfer is allowed. ^[14][20]

After an IPO, lock-up agreements often prevent insiders from selling for a set period, commonly around 180 days.^{[11] [20]}

Transfer restrictions, ROFR, and ROFO

Private-company equity often comes with transfer restrictions. Unvested shares may not be transferable without prior written consent, which means the company can block a secondary sale even if you find a buyer.^{[14] [20]} In practice, this keeps equity locked inside the company and limits how much workers can actually turn into cash.

A right of first refusal (ROFR) lets the company or investors match your outside offer and buy the shares first.^{[14] [20]} This consolidates ownership back to insiders and can reduce the value you capture.

A right of first offer (ROFO) flips the order: you must offer the shares to the company or investors before shopping them to a third party.^[15] It adds extra steps and makes timing and pricing harder to predict.

RSU expiration

RSU awards can expire if settlement does not happen by a deadline, even after you have put in the service time. This is another way equity can be pulled back to the company, shrinking what you actually receive and making the grant harder to value. Expiration is relatively rare; when it does show up, it often means the company does not really want workers to hold a meaningful slice of equity. If your grant includes this, ask why it is there and whether they would remove it.

Example: You have $2,000,000 worth of RSUs on paper, but the plan says they must settle within 7 years. The company stays private and never triggers settlement. The deadline hits, the RSUs expire, and the value goes from $2,000,000 to $0.

Common patterns to look for:

• Some plans require settlement by a fixed deadline (for example, March 15 after the vesting year). Units that cannot be settled by that date are forfeited. ^[8]
• Some awards are tied to a change in control and settle within a short window (for example, 60 days) or by a hard cap like the seventh anniversary of the grant. ^[9]

Longer timelines make these deadlines more likely to matter, especially in normal growth periods. The end result is usually less equity for workers, not more clarity.

These deadlines can be tough because they depend on events you cannot control . Settlement timing changes when you actually receive shares or cash. If settlement is delayed, the gap between “earned” and “received” can stretch for years, which is confusing for workers and often favored by the company.

Triggers

Triggers define when equity actually settles. A single-trigger award usually means time-based vesting only, with shares delivered on a set schedule after each vest date. ^[8][20]

A double-trigger award typically requires a change in control plus a second event, such as a qualifying termination or awards not being assumed by the acquirer. ^[6][20] Double triggers can delay or block settlement, which reduces what workers receive and makes the payout harder to estimate. That is why many people see them as worker-unfriendly.

Example: The company is acquired, but you keep your job and the acquirer assumes your RSUs. The second trigger never happens, so the RSUs do not settle. You can end up working years after the “exit” without ever getting paid on those shares.

Some agreements only treat a transaction as a trigger if it meets the 409A change-in-control definition. If the deal does not qualify, settlement can be delayed to a later date or deadline.^[7][9] This narrow definition can be used to avoid paying out on real exits.

Example: A buyer purchases 49% of voting power and pays investors in a large secondary. It feels like a real exit, but it does not meet the 409A threshold, so RSUs do not settle and workers get $0 at that time.

Change-of-control definitions that exclude many exits

The 409A definition of a change in control includes specific thresholds, such as a change in ownership of more than 50% of voting power or a sale of substantially all assets.^[7] Smaller asset sales, minority investments, or internal restructurings can fall outside that definition.

Many plans reference the 409A definition, and some RSU agreements delay settlement if a transaction does not meet it. That means a real-world exit can happen without triggering the payout you expected.^[9] This is another example of a clause that cuts worker outcomes and adds confusion around what the equity is actually worth.

Taxes: what gets taxed when

RSUs are typically taxed when they settle into shares. Many plans settle shortly after vesting or by a fixed deadline, so the tax event can happen even while the company is still private.^[18][8]

Stock options have different timing. Nonqualified stock options are generally taxed at exercise on the spread, while incentive stock options are generally taxed at sale but can trigger AMT at exercise.^[19]

Why it matters: you can owe taxes before you have cash from a sale, so plan for withholding or out-of-pocket payments.

Opportunity costs

Opportunity cost is the compensation you give up by choosing equity-heavy roles. Compare the cash you could earn elsewhere with the risk-adjusted value of your equity.

Hyper growth can justify a larger tradeoff if the upside is real, but normal growth often requires patience and a tighter cash plan.

Dilution

Dilution increases the number of total shares, which reduces your ownership percentage. New rounds, option pool refreshes, and down rounds can all contribute. ^{[12][13] [20]}

Simple example:

• Start: 10,000,000 shares outstanding, you own 100,000 (1.00%).
• Option pool refresh adds 2,000,000 shares. You now own 100,000 / 12,000,000 = 0.83%.
• Down round issues 6,000,000 new shares. You now own 100,000 / 18,000,000 = 0.56%.

Hyper growth often means more rounds and faster dilution. Normal growth may dilute more slowly but can still reduce your ownership over time.