How to Price Your Private Shares

One of the most challenging aspects of selling private company shares is determining a fair price. Unlike public stocks, where the market sets the price every second, private shares don't have a continuously quoted value. Whether you're looking to sell shares on a secondary market or negotiate a direct transaction, understanding how to approach pricing is essential. This guide covers the methods, factors, and practical considerations for pricing your private shares.

Why Pricing Private Shares Is Difficult

Several factors make pricing private shares inherently challenging:

• No public market: There's no stock exchange providing real-time price discovery
• Limited transaction data: Few comparable sales may have occurred
• Information asymmetry: Sellers often have limited visibility into the company's current financials
• Subjectivity: Reasonable people can disagree significantly about what private shares are worth
• Illiquidity discount: Buyers typically expect a discount because they're purchasing an illiquid asset

Despite these challenges, there are established methods and reference points that can help you arrive at a reasonable price.

Pricing Methods and Reference Points

1. Last Fundraising Round Valuation

The most commonly referenced benchmark is the company's most recent fundraising round. If the company raised money at a $100 million post-money valuation six months ago, that provides a starting point for pricing.

How to use it: Divide the post-money valuation by the total number of fully diluted shares to get an approximate price per share. Adjust from there based on other factors.

Caveats:

• The last round price may have included terms favorable to new investors (liquidation preferences, anti-dilution provisions) that don't apply to your shares
• Time has passed — the company may have grown or declined since the round
• Market conditions may have changed
• Common shares typically trade at a discount to preferred shares issued in fundraising rounds

2. 409A Valuation

Companies that issue stock options must obtain an independent 409A valuation, which establishes the fair market value of the company's common stock. If you can access this information, it provides a professional, third-party estimate of what your shares are worth.

How to use it: The 409A valuation gives you the fair market value per common share as of a specific date. It's a useful reference point, though it may be several months old.

Caveats:

• 409A valuations are typically lower than the headline valuation from the last preferred round (because common stock has fewer rights than preferred stock)
• The valuation may not be current
• Not all shareholders have access to 409A valuations

3. Revenue and Earnings Multiples

You can estimate value by applying industry-standard multiples to the company's financial metrics:

• Revenue multiple: Multiply annual revenue by an appropriate multiple for the industry and growth rate. A high-growth SaaS company might command 10x to 20x revenue, while a more traditional business might be 2x to 5x.
• EBITDA multiple: For profitable companies, multiply EBITDA by an industry-appropriate multiple.

How to use it: If you have access to the company's financial data, calculate a valuation using relevant multiples and divide by total shares to get a per-share price.

Caveats:

• Requires access to financial data, which you may not have
• Multiple selection is subjective and market-dependent
• Early-stage companies with little revenue are harder to value this way

4. Comparable Transactions

Look at secondary market transactions in the same company or in similar companies. If other shareholders have recently sold shares, those transaction prices are highly relevant.

How to use it: Research whether any secondary transactions have occurred for this company's shares. Check secondary market platforms, ask the company, or research public sources.

Caveats:

• Transaction data for private shares is often not publicly available
• Each transaction may have unique circumstances affecting price
• Small sample sizes may not be representative

5. Discounted Cash Flow (DCF)

A DCF analysis projects the company's future cash flows and discounts them to present value. This is a more sophisticated approach typically used for later-stage companies with predictable revenues.

How to use it: If you have sufficient financial data and projections, you can build a DCF model or work with a financial professional to do so.

Caveats:

• Highly sensitive to assumptions about future growth and discount rates
• Not practical for early-stage companies
• Requires financial expertise

Key Factors That Affect Price

The Illiquidity Discount

Buyers of private shares almost always expect a discount compared to what the shares would be worth if they were freely tradable on a public exchange. This "illiquidity discount" typically ranges from 10% to 40%, depending on:

• How illiquid the shares are (more restrictions = larger discount)
• How far away a potential liquidity event is
• The size of the transaction
• The overall demand for the company's shares

Share Class

Not all shares are equal. Preferred shares (typically held by institutional investors) have more rights than common shares (typically held by employees and crowdfunding investors). Common shares trade at a discount to preferred shares because they:

• Have lower liquidation priority
• May lack anti-dilution protection
• May have fewer voting rights
• Receive proceeds last in a sale or liquidation

The discount of common to preferred shares varies but can be 20% to 50% or more.

Company Performance

Has the company grown since the last valuation event? Strong revenue growth, new product launches, expanded customer base, or improved profitability justify a higher price. Conversely, declining performance, cash crunches, or lost customers suggest a lower price.

Market Conditions

Broader market conditions affect private share pricing. In a strong economy with active IPO markets, private shares tend to command higher prices. In downturns, buyers become more cautious and discounts increase.

Supply and Demand

Basic economics applies: if many shareholders want to sell and few buyers are interested, prices drop. If a company is highly sought-after and few shares are available, prices rise. High-profile companies nearing an IPO may see strong buyer demand, while lesser-known companies may see limited interest.

Time to Expected Exit

Shares in a company expected to IPO within the next year are worth more than shares in a company with no visible exit path for five or more years. The closer a liquidity event, the less risk and waiting a buyer must accept.

Practical Tips for Sellers

Be Realistic

The most common mistake sellers make is anchoring on the highest valuation they've seen — often the headline valuation from the company's latest funding round. Remember that your common shares are likely worth less than the preferred shares issued in that round, and buyers will expect an illiquidity discount.

Consider the Buyer's Perspective

A buyer needs to be compensated for the risk and illiquidity they're taking on. Ask yourself: "If I were buying these shares, what would I be willing to pay?" This perspective check can help you set a more realistic price.

Price Competitively

If you're listing shares on a secondary market platform, pricing competitively increases your chances of finding a buyer. An attractively priced listing generates interest; an overpriced listing sits unsold.

Be Open to Negotiation

In private share transactions, the initial asking price is often a starting point for negotiation. Be prepared to discuss pricing and consider reasonable offers.

Get Professional Help

For significant holdings, consider engaging a financial advisor or valuation professional. The cost of professional advice may be worthwhile for a large transaction.

Using Secondary Market Platforms

Platforms like StartEngine's secondary market can simplify pricing by providing a marketplace where supply and demand help establish fair prices. When listing on a platform:

• Review any recent transaction history for the same company's shares
• Set a price based on your research and the factors discussed above
• Monitor interest and adjust your price if needed
• Be patient — secondary market transactions can take time

Conclusion

Pricing private shares requires research, judgment, and realistic expectations. Use multiple methods and reference points to triangulate a reasonable range, then consider the factors that push the price up or down from there. Remember that buyers need compensation for illiquidity and risk, and that common shares trade at a discount to preferred shares.

The most successful sellers are those who approach pricing with the same rigor they applied to their original investment decision — grounded in data, realistic about the challenges, and focused on achieving a fair outcome for both parties.