Before option grants
Establish a supportable common-stock value before approving employee or advisor option grants.
Direct answer
What a 409A valuation is designed to do
A 409A valuation estimates the fair market value of a private company’s common stock. Companies commonly use that analysis when setting option strike prices and documenting the basis for equity-compensation decisions.
Important: a valuation is one part of a compliant equity process. Company counsel, tax advisers, and the board should confirm grant timing, approvals, plan documents, and the appropriate standard for the company’s facts.
Common triggers
When companies request an updated analysis
After a financing
Revisit value after preferred-stock financing, recapitalization, or another capital-structure change.
After a material event
Update assumptions after major revenue changes, a significant contract, acquisition activity, product milestones, or changed market conditions.
During annual governance
Refresh an older analysis when the company continues issuing equity and needs current documentation.
Before an M&A process
Coordinate equity-value analysis with transaction planning and the expected buyer or investor perspective.
For review-ready records
Maintain organized source data, assumptions, methods, and approvals for legal, tax, and financial review.
Engagement process
A straightforward four-step workflow
Scope
Confirm the decision, valuation date, company stage, capital structure, and intended users.
Collect
Gather financial history, forecasts, cap-table information, transaction history, and operating context.
Analyze
Apply appropriate income, market, and asset methods, then reconcile the indications of value.
Review
Walk through assumptions, sensitivities, questions, and final documentation with the company team.
Prepare before the call
Documents commonly requested
- Historical financial statements
- Current results and management forecast
- Capitalization table and security classes
- Recent financing and transaction documents
- Debt, warrants, options, and convertibles
- Customer concentration and recurring revenue
- Product, market, and milestone narrative
- Prior valuation reports and board materials
Valuation methods
How private-company value is analyzed
Income approach
Forecast cash flows are evaluated against company-specific risk, growth expectations, and the time value of money.
Market approach
Relevant companies and transactions provide context, adjusted for differences in size, growth, margins, and risk.
Asset approach
For asset-intensive or early-stage companies, underlying assets and liabilities may provide another indication of value.
The analysis should explain which methods fit the company, how preferred and common equity differ, and which assumptions most affect the conclusion.
Understand the number
409A Valuation Is Not the Same as the Last Funding-Round Price
A preferred-stock financing price and the fair market value of common stock answer different questions. Preferred investors may receive liquidation preferences, conversion rights, protective provisions, or other economic rights that common stock does not have. A 409A analysis considers the company’s total equity value, capital structure, and the rights of each security before estimating the value attributable to common stock.
Enterprise and equity value
The analysis begins with the company’s operating outlook, cash, debt, market evidence, risk, and other facts affecting total equity value at the valuation date.
Security rights
Preferred and common securities are not automatically worth the same amount per share. Economic rights, seniority, conversion features, and expected exit scenarios matter.
Common-stock conclusion
The final step estimates fair market value for the common stock relevant to the option or equity-compensation decision, with assumptions documented for review.
Common allocation methods
How Complex Capital Structures May Be Analyzed
The appropriate method depends on company stage, financing history, exit visibility, and available information. A valuation may use one method or reconcile more than one.
Option Pricing Method
OPM treats each security class as an option on the company’s equity value. It can be useful when the timing and form of a future liquidity event are uncertain.
Probability-Weighted Expected Return
PWERM evaluates distinct future scenarios—such as a sale, financing, continued private operation, or other outcome—and weights the indicated value of each.
Hybrid or Backsolve Analysis
A hybrid approach may combine scenarios and option-pricing concepts. A recent arm’s-length financing may also provide evidence for a backsolve, subject to the transaction’s terms and timing.
No universal shortcut: revenue multiples and the last preferred-share price may be useful inputs, but neither automatically establishes the fair market value of common stock.
Avoid delays
Founder and Finance-Team Readiness Checklist
- Confirm the valuation date and expected option-grant timeline
- Reconcile the cap table to board-approved issuances
- Provide current actual results and a supportable forecast
- Identify financings, secondary transactions, or acquisition discussions
- Document major customer wins, losses, product milestones, and risks
- Confirm cash, debt, convertibles, options, warrants, and preferred rights
- Coordinate questions with company counsel and tax advisers early
- Plan for updates after material events or when the analysis becomes stale
Complete, internally consistent records make the valuation easier to review and reduce last-minute questions before an equity grant.
409A FAQ
Questions private-company leaders ask
What is a 409A valuation?
It estimates the fair market value of private-company common stock so the company can support the strike price used for employee stock options and related equity decisions.
When does a private company need one?
Companies generally seek an analysis before option grants and revisit it after material events or when the prior analysis is no longer current. Counsel and tax advisers should confirm timing.
What information is needed?
Typical inputs include financial statements, forecasts, capitalization details, financings, debt, options, warrants, company milestones, and relevant comparable data.
How long does it take?
Timing depends on complexity and document readiness. Scope, deliverables, and expected turnaround are confirmed after the initial call.
Can the process be completed remotely?
Yes. Michelet Financial works with private companies nationwide through a remote document, analysis, and review process.
Reviewed information
Primary references and professional review
Last updated August 21, 2026 for Michelet Financial. Brandt Michelet provides business-valuation and transaction context. His professional background includes corporate financial strategy and M&A experience. This statement does not imply endorsement by a former employer or client.
- IRS Internal Revenue Bulletin 2005-43 — stock options and fair market value under Section 409A
- IRS Corporate Executive Compliance — executive compensation and stock-option guidance
- IRS Topic 427 — stock options
Educational information only; not legal, tax, audit, or investment advice. Final equity grants and Section 409A conclusions should be reviewed with qualified legal and tax advisers familiar with the company’s facts.