What methodologies do valuation firms actually use for 409A?

There are two layers to this: first, how they value the enterprise, and second, how they allocate that value to common stock. Both matter.

Enterprise valuation approaches:

• Market approach. Compares your company to public companies or private transactions in similar industries. Uses revenue or earnings multiples. Most useful when you have revenue and reasonable comparables exist.
• Income approach (DCF). Discounted cash flow — projects future cash flows and discounts them to present value. Requires financial projections. More common for later-stage companies with predictable economics.
• Backsolve / OPM Backsolve. Works backward from a recent funding round to determine total equity value, then allocates to common. Very common for early-stage startups because you have a real transaction (your last round) as an anchor.
• Cost approach / Asset-based. Rarely used for tech startups, but relevant for asset-heavy businesses.

Most reports use multiple approaches and apply weighting.

Equity allocation methods (how enterprise value gets split across stock classes):

• Option Pricing Method (OPM). Treats each equity class as a call option with different strike prices based on liquidation preferences. Standard for early-stage companies where exit timing is uncertain.
• Probability-Weighted Expected Return Method (PWERM). Models specific exit scenarios (acquisition at $X, IPO at $Y, dissolution) and assigns probabilities. More work but captures value differences across scenarios.
• Current Value Method (CVM). Simple waterfall of current value through the preference stack. Only appropriate if a liquidity event is imminent or the company is very early stage.

The DLOM question: After allocation, firms apply a Discount for Lack of Marketability (DLOM) — typically 20–40% — reflecting that private company stock can't be easily sold. This is often the most impactful assumption in the entire analysis.