409A Discount
The difference between the preferred stock price and the common stock 409A valuation, typically 60-80%.
Definition
The 409A discount refers to the difference between the price investors pay for preferred stock and the 409A fair market value of common stock. Common stock is worth less than preferred because it lacks liquidation preferences, anti-dilution protections, and other special rights. The discount typically ranges from 60-80% at early stages and narrows to 20-40% as the company matures and approaches an IPO.
Why it matters
A larger 409A discount means a lower strike price for your options, which means more potential upside per share. The discount naturally decreases as the company grows, so earlier employees benefit from larger discounts.
Example
Series A investors pay $10/share for preferred stock. The 409A valuation prices common stock at $3/share (a 70% discount). Your options are struck at $3. By Series C, the discount narrows: preferred is $30 and common is $18 (40% discount).