409A Valuation
An independent appraisal of common stock value that determines your option strike price.
Definition
A 409A valuation is an independent appraisal of a private company's common stock fair market value, required by IRS Section 409A. It is performed by a third-party valuation firm, typically annually or after a major funding event. The 409A price is always lower than the preferred stock price because common stock lacks the special rights of preferred shares. This price becomes the strike price for any stock options granted.
Why it matters
The 409A valuation directly sets your strike price. A lower 409A means a lower strike price, which means more profit when you exercise and sell. After a new funding round, the 409A typically increases, so options granted before a round have lower strikes.
Example
A company raises Series A at $5/share (preferred). The 409A firm values common stock at $1.50/share due to lack of liquidation preferences. Options granted at $1.50 strike mean you pay $1.50 to buy shares that preferred investors paid $5 for.