Pricing, tax & closing
409A Valuation vs. Last-Round Pricing
Why the price on your common stock is usually well below the number in the last funding headline.
A company's "valuation" from its last funding round is a preferred-stock price — set by investors who also hold a liquidation preference stack that pays out ahead of common stock in most exit scenarios. A 409A valuation is a separate, independent appraisal that estimates the fair market value of the common stock specifically, and it is almost always meaningfully lower than the last preferred round price per share.
This gap catches new secondary buyers off guard constantly: they see "last round priced the company at $X" and assume that's the per-share reference for the common stock they're buying, when the real anchor should sit much closer to the 409A figure, adjusted for how likely the preference stack is to actually erode common's share of an eventual exit.
How it works
- The company commissions an independent 409A appraisal (typically refreshed every 12 months or after a material event) to set the strike price for options and the IRS-recognized fair value of common stock.
- The appraisal explicitly discounts for the liquidation preferences, and other rights preferred holders have that common stock does not.
- A secondary buyer of common stock should negotiate off this 409A figure, not the headline preferred-round price — adjusted upward somewhat for the buyer's own view of how likely those preferences are to matter at exit.
Worked example
The last preferred round priced the company's common-equivalent share price at $5.00. The company's most recent 409A sets common fair value at $1.20 per share, reflecting the preference stack ahead of it.
- Last preferred round price
- $5.00 / share
- 409A common fair value
- $1.20 / share
- Gap
- 76% below headline price
- Buyer's negotiated secondary price (409A + premium)
- $1.80 / share
Why it matters: A buyer who anchored to the $5.00 headline number would be overpaying by roughly 3x relative to a price grounded in the actual 409A fair value of the common stock they're buying.
Watch out for
- Ask the seller (or the company, if possible) for the most recent 409A date and figure directly — it's not usually published, but sellers with reasonable cap-table access can often get it.
- A 409A that's more than 12 months old, or predates a recent down round or major milestone, may no longer reflect the company's current fair value.
- The 409A is a floor for thinking about pricing, not a ceiling — a company with a strong exit outlook can reasonably trade well above its 409A.