Guide
409A valuation example: what a report contains, and why no calculator
Updated
People searching for a 409A example or a 409A calculator are usually after the same thing: a sense of what the number will be before paying for it. The regulation is the reason that is harder than it sounds, and it is worth understanding why.
The regulation asks for a method, not a formula
For stock that is not readily tradable, fair market value means "a value determined by the reasonable application of a reasonable valuation method" (26 CFR 1.409A-1). There is no prescribed equation, no published multiple, and no rate table. What the regulation supplies is a standard of reasonableness, which is exactly what a calculator cannot encode.
What an appraisal actually works through
A report is a chain of decisions, each of which a reviewer can disagree with. That chain is the deliverable; the number at the end is a consequence of it.
- Enterprise value
- Usually approached by more than one route: a market approach against comparable companies or transactions, an income approach discounting projections, and for early-stage companies a value implied by the most recent financing.
- Allocation across the cap table
- The step founders underestimate. Preferred stock carries liquidation preferences and sometimes participation, so common stock is not simply enterprise value divided by shares. Option pricing or scenario-based methods allocate value between classes.
- Discount for lack of marketability
- Common stock in a private company cannot be sold freely, and the appraisal reduces the per-share figure to reflect that. The size of the discount is a judgement supported by evidence, not a constant.
- The written record
- For the start-up route the regulation expects a valuation "made reasonably and in good faith and evidenced by a written report". The report is part of what the presumption depends on, not documentation of it.
Why the common-to-preferred ratio is not a rule of thumb
The often-repeated idea that common stock is worth a fixed fraction of the latest preferred price is a description of some outcomes, not a method. The gap is produced by the preference stack, the probability and timing of an exit, and the marketability discount, all of which differ between two companies that raised at the same price on the same day.
Applying a remembered ratio to your own cap table produces a number with nothing behind it, which is the one thing the regulation's standard of reasonableness rules out.
Why this site publishes no 409A calculator
We could put three inputs in a box and return a per-share figure. It would rank, and it would be worse than useless, because the output would carry none of the reasoning the presumption actually rests on and could not be shown to anybody.
The honest version of that tool is the list above: know which allocation method your appraiser used, which comparables they chose, what discount they applied and why. Those four answers tell you more about whether a valuation will hold than any figure a calculator could return.
If what you need is a budget rather than a valuation, the cost of the engagement is a separate and answerable question, and it is the one this site's main page is about.