409A Valuation
An independent appraisal of a private company's common stock fair market value, used to legally set employee option strike prices.
A 409A valuation is an independent third-party appraisal, required under IRS Section 409A, that determines the fair market value of a private company's common stock. Companies use this value as the strike price for employee stock options, since pricing options below fair market value creates significant tax penalties for employees under the same tax code section.
409A values are typically well below the price investors pay for preferred stock in the same company, because preferred stock carries extra rights (liquidation preference, anti-dilution, board seats) that common stock lacks. Companies must refresh their 409A roughly every 12 months, or sooner after a material event like a new financing round, acquisition offer, or major change in the business.
A company raises a Series B at $8.00 per preferred share. Its 409A valuation, reflecting the lower rights of common stock, comes back at $2.50 per share — meaning new employee option grants are priced at a $2.50 strike, not $8.00, making the options meaningfully cheaper to exercise.
Refresh your 409A immediately after any priced financing round, not just on the annual clock — using a stale, pre-round 409A to price new option grants is a common compliance mistake that can trigger IRS penalties for employees.
Why is the 409A price so much lower than the price investors paid?
Because preferred stock carries extra economic and control rights (liquidation preference, anti-dilution, board representation) that common stock doesn't have, so a fair appraisal of common stock alone comes in lower.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.