What is the difference between a valuation and a 409A valuation?

“Valuation” is a broad word. A 409A valuation is a specific assignment with a specific subject: the fair market value of a private company's common stock, usually so the board can price employee stock options.

A general business valuation might answer, “What is the company worth in a sale?” An investor valuation might describe a negotiated pre-money or post-money value. A financial-reporting valuation might measure an asset or liability under an accounting standard. Those numbers can all be valid and still differ because the purpose, standard of value, date, and exact interest being valued are different.

A 409A valuation usually does two connected jobs:

1. Estimate the company's equity value using the facts available on the valuation date.
2. Allocate that value across preferred and common shares, then account for the lack of liquidity in private-company common stock.

That second job is why a 409A FMV is often lower than the price investors paid in the last preferred round. Preferred stock may have liquidation preferences, conversion rights, and other protections. Common stock sits elsewhere in the waterfall and cannot be sold freely.

You cannot safely swap in a fundraising headline, an insurance appraisal, or a rough enterprise-value estimate and call it a 409A. The analysis needs to address the common shares and the tax-rule factors relevant on the option grant date.

For the exact output, read what a 409A valuation is. For the tools used to get there, see the main 409A valuation methodologies and the process section of the founder's guide.