How much are your private shares really worth? A guide to private valuations
This guide breaks down the essentials to help you navigate your equity’s worth. From the differences between public and private stocks to key valuation types and how to leverage them—whether you’re selling, exercising options, or planning ahead.
📈 Public Stocks vs. Private Stocks
What do companies like Amazon, Nvidia, and Meta have in common? They trade on the public stock market – meaning anyone, us included, can buy a piece (i.e., a share or a fraction of it) of them through a broker or a platform of choice.
The value of the company is determined by market forces, reflecting real-time supply and demand. Think of the trading floors in the movies with prices going up, down, red, and green.
These stocks are regarded as liquid, meaning they can be bought and sold with ease. These companies also face higher scrutiny, must comply with regulations, and are required to be transparent about their financial results.
On the other hand, companies like Stripe, Databricks, Revolut, Stubhub, and Chime remain private. Their shares are not available on the public stock market and are typically held by few key people, like founders, investors, and employees with equity compensation - most likely, just like you.
Private companies face fewer regulatory requirements, since they don’t offer shares to the general public. The nature of private stocks makes them less liquid, as not everyone can buy and sell them. Additionally, their value is harder to determine since there isn’t a public market setting the price.
Understanding the different valuations is key to making informed decisions about your shares.
#️⃣ Why Are There Multiple Prices for Private Stocks?
Without a trading price, the value of a private company's stock isn't straightforward. There are different approaches to determining the likely value of the stock.
Let's look at why these different valuation methods exist:
- Investors would want to value the company based on what they paid in funding rounds. However, this price applies to preferred stock, which often has different rights and protections than common stock
- Companies are required by the IRS to set internal valuations of common stock (409A) for tax and compensation purposes, and these need to be updated regularly
- Secondary markets reflect the price buyers and sellers agree upon
- Funds and analysts might estimate the value of the company based on its industry comparisons
💡 For more information on what preferred stock is, how it works, and how it compares to common stock. Check out our article here.
⌛ Why Timing Matters in Valuation
Valuations are not only different depending on how they are calculated, but also on when they were last updated – the time component is something you should take into account when making a decision.
For instance, a 409A valuation is required to be updated every 12 months at minimum, but may not reflect the most recent company performance. A preferred funding round completed many years ago may also be an outdated valuation.
How should you use this information in practice?
When evaluating your equity, timing helps you determine which valuation is most relevant for your situation. If you’re planning on selling soon, recent secondary market prices can give you insights into demand. If you’re looking to exercise your options, understanding how your 409A compares with other prices and valuations can help you assess potential tax implications.
Ultimately, using the right valuation at the right time helps you assess your options with more context and make decisions that align with your financial goals.
⚡ Why You Should Care
By now you should be clear on why these valuations aren’t just numbers – they directly impact your equity decisions. In practice, different valuations might influence:
- Stock option exercise – should you wait or exercise your options now?
- Tender offer participation – is the price you are being offered fair?
- IPO pricing – when your company goes public, its price is influenced by how investment banks assess market demand. This is often done in relation to private valuations.
- Secondary sale – if you’re looking to sell your shares, knowing how recent secondary transactions compare to other valuations can help you guide your own pricing.
Having more knowledge about the valuations will help you maximize the value of your equity.
❓ Understanding Private Company Valuations
To help you make sense and navigate the nitty gritty, below is a table with a breakdown of the different valuations and what they tell you about your equity:
Preferred Price
The price investors paid in the latest funding round. Set by venture capitalists and investors.
| What’s it best for? | Pros | Cons |
|---|---|---|
Understanding investor sentiment and future expectations. | ➕ Shows what institutional investors think about the company | ➖ Might be inflated compared with actual market value of common stock |
409A Valuation
An independent valuation used for tax purposes. Set by third-party firms.
| What’s it best for? | Pros | Cons |
|---|---|---|
Understanding investor sentiment and future expectations. | ➕ Shows what institutional investors think about the company | ➖ Might be inflated compared with actual market value of common stock |
Public Comps
A valuation based on similar public companies. Set by investors and analysts.
| What’s it best for? | Pros | Cons |
|---|---|---|
Benchmarking against competitors. | ➕ Provides a reference based on established players in the market | ➖ It’s hard to find exact matches for private companies on the public markets given they are usually pioneers |
Secondary Trades
The price shares are sold for in private transactions. Set by market participants.
| What’s it best for? | Pros | Cons |
|---|---|---|
Seeing real-time demand for shares. | ➕ Reflects real demand and liquidity for the stock | ➖ The data is typically limited in volume, and might not be representative. Sales may occur at a discount and companies may not allow sales at all |
Fund Marks
The value that investment funds assign to their holdings. Set by investment firms.
| What’s it best for? | Pros | Cons |
|---|---|---|
Understanding how institutional investors value the company. | ➕ Gives insights into how major investors value similar assets | ➖ The valuation can vary depending on the fund |
Caplight MarketPrice™
A proprietary price estimate derived from private market data, including public comps, secondary trades, and other factors, while the range indicates the high and low price for a given stock. Set by Caplight.
| What’s it best for? | Pros | Cons |
|---|---|---|
Providing a market-driven valuation that incorporates multiple data sources, offering a more dynamic and realistic estimate of a private company's worth. | ➕ Aggregates diverse data points | ➖ Subject to variations based on available private market data |
How do these valuations work together?
Until a company goes public, no single valuation will tell you the full story – as they are the byproduct of looking at the same thing through different lenses. Combining them can paint a better picture of your stock’s worth.
For example, if your 409A valuation is low but the secondary market trades are high, it might mean there is demand that is not captured and reflected in the tax-based appraisal.
🤌 Key Takeaways
- Private stocks are valued in multiple ways because different stakeholders assess value differently.
- Each valuation serves a purpose, from tax compliance (409A) to real market demand (secondary trades).
- Using valuation data and information can help guide you when exercising, selling, or leveraging shares.
- Use our interactive tool to find the best valuation for your needs.