409A Valuation
An independent appraisal of a private company's common stock, used to set the strike price for employee options.
A 409A valuation is an independent appraisal that establishes the fair market value of a private company's common stock. It takes its name from Section 409A of the US tax code, which requires that employee stock options be granted at or above fair market value.
Without a current 409A, option grants can be treated as deferred compensation, exposing employees to immediate tax and penalties on options they have not exercised. Most startups commission one after each priced round and refresh it every twelve months.
The 409A price is almost always lower than the preferred share price investors pay, because common stock lacks the liquidation preference and control rights attached to preferred. A common-to-preferred ratio somewhere between 20% and 40% is typical at early stage.