409A Valuation Estimator

How is a 409A valuation calculated?

A 409A valuation sets the fair market value (FMV) of common stock, which becomes the strike price for employee stock options. The core idea: common stock is worth less than the preferred stock from the last round, because preferred shares carry liquidation preferences and are more liquid. So common FMV ≈ preferred price × a discount (often 30–60%).

The estimator uses three methods, chosen by stage:

• Backsolve (VC-backed) — start from the most recent preferred round's price per share, then apply a discount for common's lack of preferences and marketability. Most defensible once there is a priced round.
• Scorecard (pre-revenue) — take the median pre-money of comparable seed deals, then adjust up or down for team, market, product, and stage.
• Berkus (idea-stage) — add value across five milestones (sound idea, prototype, quality team, strategic relationships, product launch/sales), each up to ~$500K, capping near $2.5M.

Worked example: backsolve from a Series A

• A startup raises a Series A at a $20M pre-money valuation with 10,000,000 shares outstanding.
• Preferred price = $20M ÷ 10M = $2.00 per share.
• Applying a 50% discount for common (illiquidity + no preferences): common FMV ≈ $1.00 per share.
• Employee options are therefore granted at a $1.00 strike price.

This is an estimate for planning; an IRS-defensible 409A for a real option pool requires a formal independent appraisal.