What is a 409A valuation?

Short answer: a 409A valuation is a private-company appraisal of common-stock fair market value, used so option strikes are not set below FMV. It is not a preferred round price, not a bid, and not a sale. Reports go stale. Private paper is not cash. This page is not a valuation opinion, tax advice, legal advice, or financial advice.

What a 409A actually is

Public companies have a market price. Private companies do not. A 409A valuation is an independent appraisal of common-stock FMV. Companies use it when they grant options, so the strike is not below fair market value under the tax rule the report is named for. They usually refresh it on a cycle, and after material events: a financing, a tender, a sharp change in the business.

The report is not a bid. It is not a tender. It is not a secondary trade. You cannot sell into a 409A. You can use it as a dated mark when you are trying to put a number on common stock and on option spread.

You will not get a daily mark. You get a dated FMV, a strike, and a story about the company as of that date. Treating the report as a live quote is the usual mistake.

Common versus preferred

Preferred stock from a financing round is a different number. Investors buy preferred. Employees usually hold common, or options on common. Common-stock FMV used for options is often below that preferred price. Liquidation preferences, seniority, and the rights sitting on preferred are why the two prices can diverge.

Treating a round price as if it were your option FMV will usually overstate paper value. Treating a two-year-old 409A as if the company had not changed will misstate the paper the other way, or the same way. Direction depends on what happened since the report: a new round, a down round, a stalled process, a tender at a different mark.

Secondary trades and company tenders, when they exist, are also not the 409A. They can sit on the same cap table and still not be the same number. Each is a different claim about price, liquidity, and who was allowed to sell.

Stale reports and paper that is not cash

A 409A is current until it is not. Many companies aim to refresh at least annually, and sooner after a material event. An old report is still a report. It is just a report from a different company-year. Using it as today's FMV is a judgment, not a fact.

Push FMV up and option spread on paper goes up. Push FMV down and it shrinks. At or below strike, the spread can go to zero. The same 20,000 unvested options at a $4 strike are $40,000 of paper spread at a $6 409A, and $160,000 of paper spread at a $12 FMV. Same grant. Different mark. Different unvested remainder.

That remainder, the unvested value you would forfeit by leaving, is what people mean by walk-away cost in ordinary English. The 409A is one input to the paper, not proof you can sell. Discount private paper if you do not want face value. Take it at face value if you do. Either way, a 409A line is not cash in an account.

RSUs at a private company have the same cash problem. Units can vest on paper and still wait for a settlement or liquidity condition. The FMV you assign changes the unvested remainder. It does not put dollars in a bank.

If you want a private figure from an FMV you actually believe, Worth Leaving is a private calculator. For the industry definition of the forfeited remainder, see What is walk-away cost?. For a private way to run the math, see How to calculate walk-away cost without anyone knowing.

FAQ

Is a 409A the same as a round price? No. A 409A is a common-stock FMV used for option pricing. Preferred round prices are a different number, often higher, because preferred stock has different rights.

What happens if the 409A is stale? The report still describes FMV as of its date. Using an old mark as today's FMV can overstate or understate paper value, depending on what changed. Private paper is not cash.

Does a 409A mean I can sell my shares? No. A 409A is not a bid, a tender, or a market. Secondary trades and company tenders, when they exist, are separate events with their own prices and rules.