Demystifying the Price Tag: What Premiums and Discounts Mean in Private Markets

In the public stock market, finding the price of a share is as easy as a Google search. You type in a ticker symbol, and a real-time price flashes on your screen, determined by millions of buy and sell orders executing every second.

In the private markets, however, there is no ticker tape. For selling shareholders and individual investors, navigating the secondary market to determine "fair value" can often feel like a black box. You frequently encounter terms like "trading at a discount" or "commanding a premium," but what do these actually signal?

Understanding private market secondary pricing is crucial for making informed decisions. Here is a breakdown of how it works, what premiums and discounts really mean, and how to use this data to your advantage.

1. Public vs. Private: A Tale of Two Markets

The fundamental difference between public and private pricing comes down to two factors: liquidity and transparency.

• Public Markets: Prices are discovered in real-time. If bad news breaks, the stock drops instantly. If earnings beat expectations, it pops. The price is simply the equilibrium where a buyer and seller agree to trade right now.
• Private Markets: There is no central exchange. Transactions are bespoke, infrequent, and privately negotiated. A company might raise a primary funding round at $10/share in January, but by June, the secondary market might value those shares at $8 or $12, depending on supply, demand, and company performance. Because trades don't happen daily, pricing is an estimate based on available data points rather than a live feed. 

  2. Why is the Private Market so Opaque? 

  Private companies are just that: private. Unlike public corporations, they are not required to file quarterly 10-Ks with the SEC or host public earnings calls. This information asymmetry means that detailed financial data is often restricted to major institutional investors or company insiders.

  For the secondary market, this creates a challenge: How do you price something when you don't have perfect information? This opacity is one of the reasons why platforms like EquityZen exist. We aim to bridge this gap by curating publicly available information, analyzing capitalization tables, and establishing a marketplace where price discovery can happen efficiently.

3. How Valuations Are Determined in the Secondary Market

At EquityZen, we don't just guess a price. Pricing secondary deals is both an art and a science involving several key inputs:

• The Anchor Price (Last Primary Round): The most critical benchmark is the price institutional investors (like VCs) paid during the last fundraising round. This establishes the company's post-money valuation.
• Public Market Comps: We analyze how publicly traded competitors are performing. If the public SaaS sector is down 20%, it is likely that private SaaS valuations should adjust similarly.
• Secondary Transaction History: We leverage our own proprietary data from tens of thousands of transactions over a decade to see the price at which shares have actually traded recently.
• Qualitative Factors: Has the company announced layoffs? A new blockbuster product? A major partnership? These key events can impact investor sentiment and secondary pricing.

4. What Does a "Premium" Mean?

When a secondary deal is listed at a premium, it means the share price is higher than the price paid by investors in the last primary funding round.

• Why it happens: This typically signals high demand and scarcity. If a company is growing rapidly, is a leader in a hot sector (like Generative AI), or has released significant positive news since its last primary fundraise, sellers can command a higher price.
• The Signal: Investors are effectively saying, "This company has created so much value since their last round that I am willing to pay more than the institutional investors did just to get in."

5. What Does a "Discount" Mean?

When a deal is listed at a discount, which is more common, the share price is lower than the last primary funding round.

• Why it happens:
  • The Liquidity Premium: Sellers (often early employees or investors) value cash now more than paper wealth later. To incentivize a buyer to lock up their capital in an illiquid asset, the seller offers a discount.
  • Market Correction: If the broader market or specific sector has cooled off, the "last round price" might be stale and no longer reflective of current realities. We saw this frequently after the 2020 to 2021 fundraising frenzy, during which many companies raised new capital at inflated prices. 
• The Signal: Trades at a modest discount do not typically indicate the company is in trouble. This often simply means the seller is motivated, or the market is repricing the sector to align with public market multiples.

6. Making Informed Decisions: The "So What?"

So how should private market participants use this data?

For Investors:

• The Discount Opportunity: Buying at a discount may offer more room for upside. If you can buy shares at a 20% discount to what a top-tier VC firm just paid, you are effectively entering at a better cost basis than the "smart money."
  • Example: If a company raised capital at $20/share, but you can buy secondary shares at $15 (a 25% discount), you have built-in upside potential if the company exits at or near its last valuation. However, buying at a discount doesn’t guarantee an investment return.
    
• The Premium Play: Don't be scared off by premiums if the fundamentals justify it. Paying a premium for a category-defining company can still be a winning strategy if the company is able to grow into a much larger valuation.

For Selling Shareholders:

• Timing Your Exit: If your company is in a sector currently trading at a premium, it may be an opportune time to take some chips off the table.
• Understanding "The Haircut": If you need liquidity in a buyer's market, be prepared for a discount. View the discount not as a "loss," but as the price of liquidity. It is essentially the fee you pay to access your cash years before a potential IPO or exit.

Markey Snapshot: Trends We Are Seeing

• Average Discount: In the most recent quarters, the average private market discount has hovered around 29%¹, suggesting that secondary buyers are still finding significant value relative to institutional pricing. This marks a recovery towards historic norms from the steeper discounts seen in 2023. 

• Sector Watch: While some sectors see nearly every company trading at a discount like SaaS and consumer, we’ve seen strong demand driving more companies to trade at premiums in industries like Fintech and Emerging Energy¹.

The Bottom Line: Context is Key

Ultimately, a premium or a discount is just a starting point. It’s a signal of market sentiment, liquidity needs, and growth expectations. For shareholders, understanding these dynamics helps in setting realistic expectations for liquidity. For investors, it reveals where the market sees value versus where it sees hype.

By looking beyond the headline price and understanding the why behind the valuation, you can navigate the private markets with greater confidence. Check out EquityZen’s market data and valuation tools to look under the hood and find the opportunities that align best.