.svg)
409A Valuation
An independent appraisal of a private company's fair market value, required by the IRS for stock option pricing.
Formula
409A valuations use multiple methods:
- Option Pricing Method (OPM)
- Probability-Weighted Expected Return (PWER)
- Current Value Method
The appraiser weighs these based on company stage.
Definition
What is a 409A Valuation?
A 409A valuation is an independent assessment of your company's common stock value. The IRS requires it to ensure stock options are priced at fair market value, avoiding tax penalties for employees.
When You Need One
Get a 409A before issuing your first options, after any significant funding round, after material business changes, and at least annually. Most startups update after each priced round.
409A vs. Post-Money
Your 409A value is typically lower than your post-money valuation because common stock has fewer rights than preferred stock. A 3x-5x difference is common for early-stage companies.
Example
After Series A funding:
- Post-money valuation: $20M
- Preferred stock price: $2.00/share
- 409A common stock value: $0.50/share
The 75% discount reflects the difference in rights and liquidation preferences between preferred and common shares.
Related Terms
Explore other financial terms and metrics
Get complete financial clarity in under 10 minutes. No more broken spreadsheets, no more QuickBooks chaos—just the insights you need to scale with confidence.
