409A Valuation vs. Fundraising Valuation: Why Your Startup Has Two Different Prices

A startup’s 409A valuation and fundraising valuation differ because they answer different questions about different securities. The 409A process estimates the fair market value of common stock, which generally supports the strike price of employee options; a priced financing establishes what investors agreed to pay for preferred stock with negotiated economic and governance rights.

The two figures can therefore coexist even when the common-share value—and an option’s per-share strike price—is substantially below the preferred price paid in the round. That gap is not guaranteed employee profit: it does not establish what the shares will eventually sell for, whether liquidity will occur or how much common holders will receive after debt and investor preferences.

What each valuation actually measures

A 409A valuation is a point-in-time appraisal used to determine the fair market value, or FMV, of a private company’s common stock. Its practical role in an option program is to support the exercise price for new grants. The IRS rules for excluded stock rights require the exercise price to be no lower than the underlying stock’s FMV on the grant date for the relevant exclusion from Section 409A to apply.

A fundraising valuation is a negotiated transaction term. In a priced round, investors and the company agree on a price for newly issued preferred shares. Carta’s valuation comparison distinguishes common-stock FMV used for option strike prices from the post-money value implied by the preferred shares purchased in a financing.

• 409A output: an FMV per common share used when pricing new option grants.
• Financing output: a preferred-share purchase price and an implied company valuation under the round’s negotiated terms.
• Employee relevance: the first informs what you pay to exercise; the second is a transaction reference point, not the cash value of your options.

Why preferred stock can command a higher price

Preferred and common shares are claims on the same company, but they need not carry identical rights. Venture investors may negotiate liquidation preferences, conversion rights, anti-dilution provisions, dividend terms, protective provisions, information rights or board representation. The package varies by financing, so the label “preferred stock” alone does not quantify the difference in value.

A liquidation preference matters most when exit proceeds are limited relative to invested capital. It may entitle an investor to receive a specified amount before common holders participate. Depending on the charter and transaction terms, preferred holders may instead convert to common when conversion produces a better result; participating preferred can create different economics again.

Comparing only the preferred price and common FMV therefore misses the rights behind those figures. Founders assessing a round should examine dilution, liquidation terms and control provisions in the startup term sheet before treating the headline valuation as the whole deal.

How a financing influences the 409A without replacing it

A recent arm’s-length financing provides meaningful valuation evidence because investors committed money at an observed preferred-share price. It does not automatically establish common-stock FMV. An appraiser can use the transaction to infer equity value and then allocate that value among preferred series, common stock, options and other claims according to their respective rights.

Andreessen Horowitz’s 409A framework describes estimating company value, allocating it among security classes based on rights such as liquidation preferences and conversion ratios, and adjusting common stock for its lack of marketability. The framework also treats expected time to liquidity as an input to the marketability adjustment.

Allocation methods may include an option-pricing method, a probability-weighted expected return method or a hybrid. The appropriate method depends on the capital structure, company maturity, visibility into possible exits and information available on the valuation date. Employees do not need to reproduce the model, but they should understand that different security classes can receive different payouts at the same exit value.

Pre-money and post-money are not common-share FMV

The pre-money valuation is the negotiated equity value immediately before the new investment. In a simple primary financing, post-money valuation equals pre-money valuation plus the new capital invested. Converted notes, SAFEs, warrants, secondary sales and changes to the option pool can complicate the ownership calculation, so the financing documents and capitalization model matter more than a press-release number.

Consider a deliberately simplified example: a startup agrees to a $40 million pre-money valuation and receives $10 million of new primary investment. The simplified post-money valuation is $50 million, and the new investors hold 20% under the assumed post-closing capitalization. This conditional arithmetic says nothing by itself about the FMV of one common share.

To calculate any per-share figure, you need a defined share count and must know whether the denominator means issued and outstanding shares, fully diluted shares or another basis. Determining common FMV then requires accounting for the rights and seniority of each security class. Multiplying an employee’s option count by the preferred round price skips both steps.

Why lack of marketability affects common-stock value

Private-company common stock generally cannot be sold on demand through a public exchange. Transfer restrictions, limited secondary-market access, approval requirements and uncertainty about the timing of an exit can make the interest less valuable than an otherwise comparable freely tradable security.

A discount for lack of marketability, or DLOM, reflects this constraint after value has been allocated to common stock. The appropriate adjustment is company-specific, not a standard startup percentage. A longer or less certain path to liquidity can increase the economic burden of holding a security that cannot readily be sold.

A DLOM does not predict an equivalent decline in the company’s enterprise value. It is also not money credited to an employee. It is a valuation adjustment for the restrictions and uncertainty attached to an illiquid private security.

What the two prices mean for your options

Your strike price is the amount you must pay per share to exercise an option. In a conditional example, exercising 20,000 options at a $1 strike price costs $20,000 before taxes and transaction expenses. That exercise cost follows directly from the grant terms; a future gain does not.

The apparent spread between the latest preferred price and your strike price is therefore not current profit. You may be unable to sell the resulting common shares, the company may issue additional securities, and a sale at a disappointing value may leave little for common after debt and liquidation preferences. At a strong exit, preferred holders may instead convert to common if the governing terms make conversion more valuable.

Two grants issued at different times can also have different strike prices even when their option type and vesting terms are otherwise identical. The relevant comparison for each grant is its own exercise price, option count, expiration terms and underlying security—not the preferred price from a different transaction.

A document checklist for evaluating an equity offer

You do not need to forecast the company’s exit value to determine whether an offer is adequately documented. Start with the terms that establish what you may acquire, what it costs and when your rights expire. A company may decline to disclose its complete capitalization table or appraisal report, but it can often provide grant-specific information and a high-level explanation of its capital structure.

• The number of options and the exact class of stock underlying them.
• The strike price and the effective date of the common-stock FMV used for the grant.
• The company’s fully diluted share count, or your approximate fully diluted ownership percentage and the date of that calculation.
• The vesting schedule, cliff, vesting commencement date and any acceleration provisions.
• The option type, such as an incentive stock option or nonqualified stock option, plus the governing equity plan and grant agreement.
• The contractual expiration date and post-termination exercise window.
• Whether early exercise is permitted and whether the company can repurchase unvested shares.
• The preferred price and pre-money or post-money basis of the latest priced financing.
• A high-level description of outstanding liquidation preferences, including seniority and whether preferred shares participate or convert.
• Transfer restrictions, any history of company-sponsored tender offers and the policy for secondary sales.

Ask whether the stated ownership percentage includes the current option pool and outstanding convertible securities. Also ask which events can change that percentage. The answers will not produce a reliable future payoff estimate, but they reveal whether the offer includes a meaningful denominator and the caveats needed to interpret it.

Common comparison mistakes

The first mistake is treating the headline post-money valuation as though every outstanding share could be sold immediately at the financing price. That assumption ignores differences between securities, future dilution, transaction restrictions and the specific terms under which investors bought preferred stock.

The second is calling the difference between preferred price and strike price an “equity discount.” A lower strike price reduces exercise cost, but it does not remove business risk or guarantee liquidity. The option also has vesting, expiration and tax conditions that can materially affect the holder’s decision.

The third is assuming a falling common-stock FMV proves the company is failing—or that a rising financing valuation means common holders have already realized a gain. Either figure can change with company performance, market conditions, financing terms, capitalization and the probabilities assigned to possible outcomes.

Finally, do not apply a universal common-to-preferred ratio. Two companies with the same post-money valuation can have different common FMVs because their preference stacks, cash positions, capitalization, liquidity prospects and operating outlooks differ.

Use each price for the decision it supports

For a new grant, verify the common-share strike price, grant date, option count and fully diluted ownership context. For a financing, examine the preferred price together with dilution and investor rights. Keeping those analyses separate prevents a negotiated venture price from being mistaken for an amount an employee can realize today.

Before exercising options, making a tax election or accepting a material compensation trade-off, obtain advice that accounts for your option type, tax residency, holding period and personal finances. The useful next step is not guessing an exit price; it is closing gaps in the documents, costs and deadlines you can verify now.

Also read:

• How to Read a Startup Term Sheet Before You Sign It
• Kling AI Raises $2.8 Billion at $18 Billion Valuation in July 2026 Round
• Augustus Raises $180M Series B at a $1B Valuation: What It Means