409A Valuation
Definition
A 409A valuation is an independent or supportable valuation of a private company's common stock used for tax compliance under Section 409A. It helps set the fair market value for stock option grants and other deferred compensation arrangements, usually at a different value than preferred shares sold in financing rounds.
Why it matters
409A valuations affect strike prices, option exercise economics, tax exposure, and employee equity planning. In pre-IPO secondary markets, investors often see large gaps between preferred financing marks, secondary bids, common-stock 409A values, and tender offer prices. Understanding those gaps helps prevent bad comparisons.
Common misconceptions
- •A 409A valuation is not the same as the latest preferred-share valuation.
- •A low 409A value does not automatically mean the company is cheap; it often reflects common-stock rights and preferences above it.
- •Secondary prices, tender prices, and 409A values can all be valid for different purposes.
Technical details
Why common and preferred values differ
Preferred shares often carry liquidation preferences, anti-dilution rights, information rights, and negotiated investor protections. Common shares generally sit below preferred in the capital stack.
409A valuations allocate enterprise value across the capitalization table and often apply discounts for lack of marketability, lack of control, and common-stock subordination.
When valuations update
Companies typically update 409A valuations at least annually and after material events such as financing rounds, major revenue changes, acquisitions, tender offers, or IPO preparation.
A stale 409A can create tax and compensation risk if options are granted below fair market value.
Diligence questions
Is the secondary asset common stock, preferred stock, RSUs, options, or an SPV interest?
How does the 409A value compare with last preferred round, tender price, and observed secondary bids?
Are there liquidation preferences or senior securities that explain the valuation gap?