Noncompensatory sales, on the other hand
The Privately-Traded Company: The $225 Billion Market for Pre-IPO Liquidity
The key issue is that tax treatment turns a liquidity program into either employee compensation or a real market sale. When a sale looks noncompensatory, the seller is treated more like an investor disposing of an asset they already own, so gains can qualify for long term capital gains instead of ordinary income. That is why late stage companies often weigh employee tax efficiency against the higher 409A signal that comes from a more market like transaction.
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A sale starts looking compensatory when the company structures it mainly as an employee benefit. The clearest flags are insider only participation, employee only sellers, pricing far above 409A, or different terms for employees and investors. In that setup, the tax code is more likely to treat proceeds as compensation for work.
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The trade is simple. Noncompensatory treatment is usually better for sellers because long term capital gains rates are lower than top ordinary income rates, and compensatory treatment can also create extra FICA cost for the company. But the more market based the sale looks, the more it can influence the company’s 409A valuation.
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In practice this is why younger companies often bias toward protecting 409A, while later stage companies closer to IPO often bias toward better employee tax treatment. Once a company is already moving toward regular liquidity and public market style price discovery, preserving a very low 409A matters less than making equity feel real and sellable.
This pushes the market toward more segmented liquidity programs. Earlier private companies will keep sales tightly controlled to protect option pricing, while mature private companies will design broader, more arm’s length transactions that make equity behave more like stock in a real market, and make employee ownership materially more valuable.