409(a) Valuation

An independent appraisal, required under U.S. tax law, of a private company's common stock fair market value, used to set the strike price of employee stock options.

Example

A company's preferred stock last priced at 2.00 a share may carry a 409(a) common valuation of well under 1.00, because common lacks the preference and other rights preferred holds.

Important

A 409(a) valuation and the last round's preferred price are different numbers by design - a wide gap between them is normal, not an error in either figure.

Related terms

• Liquidation Preference — A contractual right for preferred shareholders to receive a stated multiple of their investment back before common shareholders receive anything, in a sale or wind-down.
• Post-Money Valuation — A company's agreed value immediately after a financing round's new money has been added, equal to the total resulting share count multiplied by the round's price per share.
• Illiquidity discount — The reduction in price a seller must accept to find a buyer for something that cannot be readily traded.

Lessons that explain it

• The price is whatever the last round negotiated, and preferred is not common — Between financings there is no price at all, only the last round's number carried forward. And the price paid for preferred stock buys something a common shareholder does not have - which is why two shares issued in the same round at the same price are not worth the same thing in every outcome. (11 min)

All 578 terms in the Investing glossary