Your Startup Shares Probably Aren't Worth What the Funding Headlines Suggest

A company raises at a $2 billion valuation. An employee does the mental math — my 0.05% must be worth about a million — and quietly starts spending it in their head. Then they try to sell some, and the offers come in at a fraction of that number, and they assume someone's ripping them off. Usually, nobody is. They've just been anchoring to the wrong number the whole time.

There are two gaps between the headline valuation and what you'd actually get, and it's worth understanding both, because they change how you plan and how you negotiate.

Gap one: preferred versus common

When investors put money into a startup, they almost always buy preferred shares. Preferred comes with protections ordinary shares don't have — most importantly a liquidation preference, which means investors get paid back first if the company sells, and often anti-dilution rights on top. Those protections have real economic value. Employees and founders hold common shares, which sit behind preferred in the queue and carry none of that. So when a company raises at a headline price, that price is for the protected, senior class — not for the shares you own. Common is genuinely worth less, and at early stages the gap can be large. This isn't a technicality; it's the single biggest reason your shares are "worth less than the news says."

There's even an official number that reflects it: the 409A valuation (or your country's equivalent), an independent appraisal of the common shares done for tax and to set option strike prices. It's almost always well below the last round's headline, and that's not a mistake — it's measuring a different, junior thing. If you want a defensible reference point for what you hold, the common-share valuation is a far better anchor than the press-release number.

Gap two: the secondary discount

Even off the common-share value, a private sale takes another haircut. A buyer purchasing a small, minority stake they can't easily resell, in a company they can't see inside the way an institutional investor can, is taking on illiquidity and information risk — and they price for it. How big the discount is depends on the company: an in-demand, later-stage name trades close to its last mark; a very early or thinly-traded one can go much lower. There's no magic percentage, and anyone quoting you an exact one as a rule is guessing.

So the realistic sequence is: start from the common-share value (not the headline), then apply a secondary discount for a private, minority, sell-now deal. What's left is roughly what a real buyer would pay. It's a smaller number than the one in your head — but it's the true one, and knowing it is the difference between negotiating from confidence and feeling cheated by every offer.

A few practical consequences fall out of this. If you hold options, remember the exercise cost comes out of your net — the value that matters is after you've paid to turn options into shares (and after any tax on exercising). If you're comparing an offer to "what the company's worth," make sure you're comparing like with like: their common, not the headline's preferred. And if a valuation is a couple of years old — a stale 409A or an ageing round — treat it with suspicion in both directions; the company may have grown into a higher number or stumbled into a lower one.

None of this is a reason to be gloomy about equity. It's a reason to hold an accurate picture of it. The people who get burned in secondaries aren't the ones who sell at a discount — a discount is normal. They're the ones who anchored to a fantasy number, turned down fair offers waiting for it, and ended up with illiquid shares and a chip on their shoulder. Know which number you actually own, and the rest of the decision gets a lot clearer.