Frequently Asked Questions
What is a 409A valuation? ▼
A 409A valuation is an independent appraisal of a private company's common stock fair market value (FMV). Named after Section 409A of the Internal Revenue Code, it determines the strike price for employee stock options. The IRS requires companies to set option exercise prices at or above FMV to avoid penalties (20% excise tax + interest).
Why is the 409A price lower than the preferred stock price? ▼
Preferred stock has superior rights: liquidation preference (they get paid first in a sale), anti-dilution protection, dividend rights, and voting preferences. Common stock has none of these protections, making it inherently less valuable. The discount typically ranges from 30-60% depending on stage — earlier companies have larger discounts due to higher risk.
How often do I need a new 409A valuation? ▼
Every 12 months, or whenever a "material event" occurs. Material events include: closing a new funding round, reaching a major revenue milestone, receiving an acquisition offer, or significant changes to the business model. After raising a priced round, you should get a new 409A within 60 days.
What is the backsolve method? ▼
The backsolve method is the most common approach for VC-backed startups. It starts with the price per share of the most recent preferred stock round and works backward to determine the common stock value by applying a discount that reflects the inferior rights of common stock. This method is preferred because it's based on an actual market transaction.
What discount should I use? ▼
Typical discounts by stage: Seed (50-70%), Series A (35-50%), Series B (25-40%), Series C+ (20-30%). Earlier stage = higher discount because common stock is riskier. Companies with predictable revenue tend to have lower discounts. This is a simplified estimate — a formal 409A will use option pricing models (Black-Scholes) to derive the exact discount.
Can I use this instead of paying for a formal 409A? ▼
No. This tool provides estimates to help you understand the math and prepare for conversations with appraisers. The IRS requires a formal, independent 409A valuation from a qualified appraiser. However, using this calculator first helps you understand what to expect and verify that your appraiser's numbers make sense.