Your company raised a Series D at $15 per share. You're selling shares on the secondary market and getting offered $11 per share - a 27% discount. Is that fair or are you getting fleeced? The answer requires understanding why the discount exists at all. The secondary discount is not random. It's a rational response to real economic differences between buying in a funding round and buying on the secondary market.
What Is the Secondary Discount?
The secondary discount is the difference between what a Series D investor paid for preferred shares (typically the baseline for pricing) and what a secondary market buyer is willing to pay for common or earlier-round preferred shares. Typical range: 20-40% below the most recent funding round.
This discount is normal and expected. It exists in every private market, from venture to real estate to fine art. The question is not whether a discount exists, but whether the discount you're being offered is reasonable for the specific risks you're being asked to shoulder.
Key Concept
A secondary buyer paying 30% less than the last round is not necessarily getting a bargain or you getting a bad deal. Both prices can be rational given the differences in timing, risk, and information available to each buyer.
The Five Reasons for the Discount
1. Illiquidity Risk: The Buyer Owns an Illiquid Asset
A Series D investor bought preferred shares with anti-dilution protection and potentially board representation. A secondary buyer gets common stock with no such protections. More importantly, a secondary buyer is buying an illiquid asset - they might not be able to sell for years. The buyer requires a discount to compensate for that illiquidity.
This is fundamental. Public equity trades instantly. Private equity is illiquid. A 30% discount for illiquidity is standard in any private market. Earlyasset Capital applies this same logic - buying at a discount to compensate for the 5-7 year hold required before the company exits.
2. Information Asymmetry: Insiders Know More Than Outsiders
You've worked at the company. You know the revenue trends, customer concentration, cash burn, and management quality firsthand. A secondary buyer is seeing public information - maybe some limited due diligence - but they have fundamentally less information than you do.
This information asymmetry cuts both ways. The buyer might find out the company's growth is slowing faster than public statements suggest. Or they might discover key customer concentration that raises acquisition risk. They discount to account for information they don't have.
3. ROFR Risk: The Company Can Block the Sale
Most stock plans include a right of first refusal (ROFR) - the company can step in and buy the shares at the price you negotiated with the secondary buyer. This creates deal risk for the buyer. They spend weeks due diligencing and negotiating with you, then the company exercises ROFR and they lose the deal.
Secondary buyers price in this risk. If the company has an ROFR and has historically used it, the discount is larger. If the company has never exercised ROFR, the discount might be smaller. Earlyasset prices this specific risk by company.
4. Share Class: Common is Worth Less Than Series D Preferred
A Series D investor bought preferred shares. You likely own common shares. Preferred has liquidation preferences and anti-dilution rights. Common shares are subordinated. This is a structural difference, not a temporary market condition. Common shares should trade at a discount to preferred.
How big a discount? Depends on the cap stack. If the company has $200 million in preferred investments and is valued at $500 million, the common is worth much less. The discount compensates for this structural subordination.
5. Time Decay and Market Conditions: Private Markets Move Slowly
The Series D was 12-18 months ago. Markets have changed. Public SaaS multiples might be down. Interest rates might be up. Venture funding might be tighter. The company's own fundamentals might have changed. All of these factors shift the discount.
Sometimes the discount gets smaller - if the company has accelerated growth or the market has recovered. Sometimes it gets larger - if the company has stumbled or venture sentiment has cooled. Earlyasset updates its discount model as market conditions and company-specific data change.
Example: Why Discount Varies
Company A raised Series C at $5 per share 18 months ago, revenue growth has accelerated from 50% to 120% YoY, no ROFR restrictions, clean cap stack. Secondary discount: 20%. Company B raised Series C at $5 per share, revenue growth has decelerated from 80% to 35%, strong ROFR exercised last year, $200M in preferences. Secondary discount: 35%. Both are rational.
Is Your Discount Fair?
A 30% secondary discount is in the standard range. But is 30% fair for your specific situation? Consider these factors.
First: Has the company's fundamentals improved or declined since the last round? Faster growth and expanded margins justify a smaller discount (or even a premium). Slower growth and narrowed margins justify a larger discount.
Second: How restrictive is the ROFR? If the company has a history of exercising ROFR, the buyer is taking on real deal risk. If the company never exercises it, the risk is lower and the discount should be smaller.
Third: What's the state of the private market? In 2021, secondary discounts were tighter (15-20%). In 2023-2024, they've widened (25-40%). Market conditions matter.
Fourth: What does Earlyasset's model say? Earlyasset uses data from thousands of secondary transactions to estimate the fair discount by company and market conditions. If a buyer is offering significantly below Earlyasset's estimate, you have leverage to negotiate.
Earlyasset's Approach to the Secondary Discount
Earlyasset Capital (the fund) applies its own secondary discount - typically 20-35% below the last funding round - because the fund needs to generate target returns over a 5-7 year hold. Lower entry price equals higher exit multiples.
But Earlyasset (the shareholder platform) doesn't apply an arbitrary discount. Instead, it models the factors above - company growth, market conditions, ROFR risk, and cap stack - to estimate what a buyer would actually pay today. That's the secondary market price. It accounts for the discount implicitly by using real secondary transaction data.
⚠️ Don't accept a discount without understanding why. If a buyer offers 40% below your Series D price but Earlyasset's model suggests 25% is fair, you have room to negotiate. The discount is rational, but that doesn't mean you should accept any discount offered.
When to Accept (and When to Push Back)
A secondary discount in the 20-35% range is typically fair. If you're being offered less (40%+ discount), push back or shop the deal to other buyers. If you're being offered more (less than 15% discount), you might be in a hot deal or the buyer might be overpaying.
Use Earlyasset's price estimate as your anchor. If a buyer's offer is significantly below Earlyasset's secondary market price, you have data to support a higher ask. If the offer is at or above Earlyasset's estimate, the buyer is pricing fairly.
The secondary discount is not a conspiracy against you. It's an economic reality of illiquid private markets. Understanding why the discount exists - and whether your specific discount is fair - is the difference between getting a good price and getting fleeced.
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Price estimates are provided for informational purposes only and do not constitute financial, investment, or legal advice. Estimates are based on proprietary models and available market data and may not reflect actual transaction prices. Secondary discounts vary significantly by company, market conditions, and individual circumstances.