409A valuation

Worked example

A worked example of the 409A-to-preferred gap (illustrative figures):

1. A company's most recent preferred round priced at $25/share. Its independent 409A appraisal sets the common stock fair market value at $3/share — a common-to-preferred ratio of just 12%, typical for an earlier-stage company with a large liquidation preference stack ahead of common.
2. An employee with options struck at that $3/share 409A price exercises 10,000 options, paying $30,000 out of pocket to convert them into common shares.
3. If those shares are later sold in a tender offer priced at $18/share (itself already a discount to the $25 preferred price, since common sits behind preferred in the payout order), the employee receives $180,000 — a $150,000 spread over their $30,000 exercise cost, which is generally taxable.
4. The 409A number matters to sellers for exercise and tax planning; it is not what a buyer pays in a secondary sale, which is priced off the common stock's actual expected value in an exit, not the conservative 409A appraisal.