Full Definition
A 409A valuation is an independent appraisal of the fair market value of a private company's common stock, required by Section 409A of the Internal Revenue Code. It's used to set the exercise price (strike price) for employee stock options and must be conducted by a qualified independent appraiser.
When You Need a 409A
- Before issuing the first stock option grants
- After each new funding round
- At least annually (every 12 months)
- After a material event that could change company value
409A Valuation Methods
- Market Approach: Comparing to similar public companies or recent transactions
- Income Approach: Discounted cash flow analysis
- Asset Approach: Valuing the company's tangible and intangible assets
The 409A value is typically 25-50% of the preferred stock price in early-stage companies, reflecting the difference in rights between common and preferred shares.
Real-World Example
After a $10M Series A at $5/share for preferred stock, the 409A valuation sets the common stock fair market value at $1.25/share (25% of preferred price).
Related Terms
The right to buy company shares at a predetermined price, commonly used as employee compensation in startups.
Basic ownership shares in a company, typically held by founders and employees with standard voting rights.
The estimated monetary worth of a company, determined through various methods and negotiations.
A reserved percentage of shares set aside for future employee stock options and equity grants.
Ownership interest in a company, represented by shares of stock.
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