Secondary market prices and 409A valuations routinely diverge, a gap that sharpens decisions around employee option expiry. That divergence is not a quirk — it is expected. Secondary prices reflect what a willing buyer pays today for expected future value; 409A valuations are backward-looking appraisals of fair market value on a specific date, typically prepared by an independent firm and accepted by the IRS for option pricing purposes.

For shareholders selling stock they have already purchased and fully own, the gap between secondary price and 409A is mostly a tax character question — capital gains versus ordinary income depending on holding period. But for option holders who exercise concurrent with a secondary sale, the gap is an immediate income event that most sellers do not model in advance.

Why the gap exists and how large it can get

Companies are required to obtain a new 409A valuation at least annually, or whenever a material event — a financing round, a significant business change — makes the prior one stale. In practice, fast-growing private companies often let 409As lag reality. A company that raised a Series D at a dramatically higher valuation six months ago may still be operating under a 409A that predates that round, because the board has not yet commissioned a new appraisal.

The secondary market, meanwhile, prices in that new round immediately. Buyers factor in the Series D implied per-share price, apply a discount for illiquidity and time, and bid accordingly. The result: a secondary market bid that sits comfortably above the company's most recent 409A strike price.

For context, secondary market prices for high-profile AI and defense-tech issuers have regularly traded at 40–120% premiums to the most recently disclosed 409A fair market value figures. That gap is where the tax complexity lives.

ISO holders: the spread is ordinary income at exercise

Incentive stock options — ISOs — are priced at the 409A fair market value on the date of grant. When you exercise an ISO, the spread between the strike price and the fair market value on the exercise date is an Alternative Minimum Tax preference item. Under regular tax rules, ISOs defer income recognition until sale.

Here is where the 409A gap matters for sellers. If you exercise ISOs and simultaneously sell those shares in a secondary transaction — a same-day exercise-and-sell — the sale disqualifies the ISO treatment. A disqualifying disposition converts the spread (exercise price to sale price) into ordinary compensation income, reported on your W-2 for the year of sale. There is no capital gains treatment, no long-term rate, no deferral.

A same-day exercise-and-sell of ISOs at a secondary price materially above the exercise price is a disqualifying disposition. The entire spread is taxed as ordinary income in the year of sale, at rates up to 37% federally.

This is not a fringe scenario. Many employees who want liquidity do not have the cash to exercise options before a sale and carry the shares for the holding period required for ISO treatment. They exercise at closing and sell simultaneously. The 409A gap determines how large the ordinary income hit is.

NSO holders: the mechanics are cleaner, but the number is the same

Non-qualified stock options — NSOs — do not offer ISO tax treatment regardless of holding period. The spread at exercise is always ordinary income, always in the year of exercise. For NSO holders, the 409A gap affects the size of that income event but not its character — it was always going to be ordinary income.

What NSO holders need to watch is whether the company's most recent 409A has been updated to reflect the current secondary pricing environment. If the 409A is stale and the company's board has internally discussed a new valuation that is materially higher — even if not yet formally adopted — there is a risk that the IRS challenges the 409A on audit and re-prices your exercise event upward. This is rare, but it is not hypothetical.

Restricted stock units are a separate problem

Restricted stock units — RSUs — are taxed as ordinary income when they vest and settle, based on the fair market value of the shares at settlement. If your company uses the 409A as its valuation for RSU settlement (common for private companies), a stale 409A may actually understate the income reported on your W-2 relative to what you could realize in a secondary sale.

Some companies have begun updating their 409A valuations more frequently as secondary market activity has become a reference data point that tax authorities and auditors have started examining. If your company has done this and the updated 409A is close to secondary market pricing, the gap risk is reduced. If the 409A is twelve or eighteen months old and secondary prices have moved significantly, the risk of a mismatch — and a surprise withholding event — is real.

The practical checklist for sellers before accepting a secondary price

  • Confirm the date of the company's most recent 409A and the valuation it produced. Many companies will disclose this to employees on request; some post it in equity management platforms.
  • Calculate the spread: secondary offer price minus 409A fair market value per share. That number, multiplied by your share count, approximates your potential ordinary income exposure if you exercise-and-sell.
  • Determine option type: ISO or NSO. ISO holders face disqualifying disposition risk on same-day exercise-and-sell; NSO holders face ordinary income on the spread regardless.
  • Model the withholding. If the spread is large enough, your company's payroll department may require supplemental withholding at closing. Surprises here delay settlement.
  • Ask whether the company has a tender offer or structured liquidity program open concurrently. Company-sponsored tenders sometimes include a coordinated exercise mechanism and pre-agreed 409A treatment — different economics than an open-market secondary.
  • Consult a tax professional before executing. The figures above are general explanations, not tax advice, and your situation depends on your specific grant documents, state of residence, and tax lot history.

How the 409A gap affects negotiation

Understanding the gap is not just a tax planning exercise — it is a negotiation input. If a buyer offers a per-share price that looks attractive gross but leaves you with a large ordinary income bill, your net proceeds may be lower than a slightly lower gross price with cleaner tax treatment.

For example: a seller with NSOs exercising at $10 per share and selling at $60 in a secondary transaction has a $50 per-share spread taxed as ordinary income. At a 37% federal marginal rate plus state tax, the seller nets roughly $28–$32 per share after tax on the spread, plus the exercise cost. A secondary price of $55 with a lower income event — perhaps because the seller is selling already-vested, already-exercised shares with a long-term capital gains holding period — might net considerably more.

Gross secondary price is not the same as net proceeds. The 409A gap, option type, holding period, and state of residence all change what you actually keep.

What Limen Markets sellers should do next

If you hold options or unvested equity in any of the issuers on our marketplace, the first step is to pull your grant agreement and equity plan document before you engage with buyers. The grant agreement specifies option type, strike price, and vesting schedule. The equity plan specifies transfer restrictions and company consent requirements — which interact directly with how and when a secondary transaction can close.

Once you have those documents, the net proceeds modeling article can help you build a realistic picture of what you will receive after fees, taxes, and the 409A spread. When you are ready to explore live buyer interest, the seller section of our marketplace shows current demand across 28 issuers, with pricing updated hourly.