Secondary Transactions and 409A Valuations – Part 2: FF Preferred Stock

In Part 1 of this series (Secondary Transactions and 409A Valuations – Part 1: The Potential Impact), we discussed secondary transactions and their impact on 409A Valuations.  To recap, the liquidity that some founders and early employees receive from their company or outside investors, considered secondary transactions, can sometimes re-establish the price per share for stock option grant (409A) purposes at the same price as the secondary transaction.  Secondary transactions are often done in conjunction with a funding round so they are often at the same price as the round’s preferred stock.  If common stock was sold in the secondary transaction, future option grants may have to be granted at this higher price, which is not ideal for new employees receiving options based on the latest preferred stock price.

One way to avoid impacting the price of common stock while still getting liquidity is the issuance of Series FF preferred stock in conjunction with founder common stock at inception, instead of only issuing common stock.  Series FF stock acts as a hybrid between common and preferred stock, and is issued to the founders at the time of incorporation. While Series FF preferred stock is deemed “preferred”, there are almost no identifiable differences between Series FF and common stock. This allows founders to get liquidity prior to an exit, and since the transaction is not with the same security as those being granted under 409A, the secondary transaction with FF stock will not impact the share price for 409A purposes.

Series FF mimics the attributes of the common stock with one exception: if it is sold in connection with an equity financing, the shares convert to the same series of preferred stock that is being issued. For example, if the holder of the Series FF stock is looking to sell the stock while the Company is raising a Series B round, the Series FF stock could be sold at the price per share of the Series B shares.

Series FF stock is also convertible into common stock at any time and automatically converts into common stock upon a qualified IPO or upon consent of the majority of Series FF holders.

If you would like to discuss secondary transactions, their impact on 409A Valuations and the use of FF stock, please contact Jeff Faust, CVA, Director of Valuation Services via email: or phone: 408-377-8700 x232; or please contact Irina Plevako, CFA, CVA, Manager of Valuation Services via email: or phone: 408-377-8700 x233.