Private Company Valuation: Is the Number Real… a Story... or BS?

Important upfront disclaimer: This article is intentionally written as a counter-argument. It is not how I default to thinking about private companies, venture capital, or startup equity. In practice, I generally assume markets are trying to be efficient and that most participants are acting in good faith.

But finance is one of those domains where you are objectively worse off if you blindly accept the number you’re told, without considering all the possible reasons that could mean it’s not a reliable.

So the purpose of this piece is simple: to explore how — in certain situations — private company valuations can be economically misleading even when no one is lying.

Not always.

Not usually.

But plausibly, and sometimes intentionally.

If you hold private company equity, especially at a venture-backed company, this perspective matters.

How is a Company Price REALLY Determined?

At its core, price is determined by supply and demand.

That’s true in public markets, and private markets.

But how supply and demand are allowed to interact — the market structure — makes an enormous difference in how trustworthy a price actually is.

Public markets: constant, adversarial price discovery

In public markets, price discovery is brutal and continuous. At any moment:

• thousands of buyers and sellers can participate

• bids and asks are visible

• anyone with capital can lean against a price they think is wrong

If you pull up a Nasdaq Level II quote screen, you have real time details on how many shares participants are willing to buy, at what prices, and how deep that interest actually is (let's ignore dark pools for now).

Prices CAN still be irrational. They CAN still be manipulated (low float, meme stock dynamics, etc.).

But it’s hard to maintain a fake price for long when liquidity is real, supply is available, and skeptics can actively trade against the narrative (including short selling).

Private markets: negotiated price discovery, not continuous price discovery

Private markets are fundamentally different from public markets in many ways, including price discovery. In private markets there are:

• no continuous order book of bids/asks for stocks (like the stock market)

• no visible depth of demand

• no requirement that price reflect what would clear meaningful volume

Instead, price is discovered episodically, usually through a funding round, a structured secondary, or a tender offer.

And here's the critical difference: In private markets, the company itself can influence the entire setup of the deal. That includes:

• when the transaction happens

• how big it is

• who is allowed to participate

• what security is being sold

• and what rights that security carries

None of that is inherently bad. But it means the headline valuation deserves more scrutiny than most people give it.

How Private Valuations Can Be “Real” and Still Misleading (4 Mechanisms)

What follows is not a list of tricks. It's a list of structural realities that can lead to a valuation drifting away from what employee equity is actually worth. Of note: the most successful companies can be highly selective about when and how they raise capital, giving them more influence over how valuations are set and perceived.

1. The price is set on a tiny sliver of shares

The scenario: A company can raise $200 million at a given price and imply a $20 billion post-money valuation (this is more common in late-stage rounds where companies are already well-capitalized and raise incremental funding for growth, strategic flexibility, or to satisfy investor demand rather than out of immediate capital need).

The mechanisms:

• only 1–2% of the company actually traded,

• no one could sell meaningful size anywhere near that price,

• and there is no open market to test demand

Outcome: That price is real for that sliver of stock. It may not be real for the other 98%.

2. The company controls supply

The scenario: In public markets, supply is mostly outside management’s control. In private markets, companies can manipulate the supply paradigm.

The mechanisms: Companies can limit the amount of the VC-round raise, restrict secondaries, limit tender programs, approve only certain buyers, or delay liquidity events indefinitely.

Outcome: Less available supply makes it easier for a negotiated price to persist — even if it wouldn’t hold up under broader selling pressure.

3. Investor protections let valuations climb while common stock value quietly falls

The scenario: Founders may accept a higher headline valuation paired with stronger investor protections, because optics matter for recruiting, morale, and signaling.

The mechanisms:

• Stacked liquidation preferences. When a company raises multiple rounds of preferred capital, those preferences pile up. In many exit scenarios, preferred holders get paid first—common holders get what's left, if anything. Two companies can have identical valuations and radically different outcomes for employees depending on the preference stack.

• Anti-dilution provisions. These protections shield preferred investors in down rounds. They don't change the headline valuation when times are good, but they matter enormously when times are not. Employees often don't realize how much downside risk is being shifted away from investors and toward common holders.

• Participation rights. These allow preferred holders to get their liquidation preference paid out and then participate in remaining proceeds alongside common shareholders—sometimes called "double-dipping." This means investors can get more than their share of the pie even when an exit happens at the headline valuation.

• Accumulated dividends. Preferred shares may accrue dividends (often 6-8% annually) that must be paid out before common holders see anything, further reducing what employees actually receive in an exit.

Outcome: Stronger investor protections mean more risk gets shifted onto employees—when investors are protected from downside, common shareholders absorb it. In poor outcomes, investors may recover most or all of their capital while employees get nothing. But even in successful exits, these provisions can mean employees receive far less than the headline valuation would suggest.

4. 409A valuations tell a different story — for a reason

The scenario: A 409A valuation estimates the fair market value of common stock—as opposed to the preferred stock that investors purchase. Its purpose is to set compliant strike prices for employee stock options and reflect what common shareholders actually own.

The mechanisms: 409A valuations account for the actual economics of common stock by considering:

• Liquidation preferences: How much preferred holders must be paid before common gets anything

• Exit probabilities: The likelihood and timing of various exit scenarios

• Capital structure: The full stack of investor protections and how they reallocate value

But 409A valuations also have a built-in conservative bias: valuators face legal liability if they're too high (IRS penalties) but not if they're too low, and they apply significant discounts (often 20-30%+) for illiquidity since common stock can't be easily sold.

Outcome: In successful exits, actual employee payout typically lands between the 409A and the preferred price, or exceeds both in breakout scenarios. In poor exits, liquidation preferences mean employees may receive far less than the 409A, or nothing at all. The 409A is more realistic than the preferred price, but it's a conservative legal estimate—not a floor or a prediction.