Understanding the Delta

When 409A Valuations Differ from Funding Rounds

In early‑stage and growth‑stage companies, it is common, and often surprising to founders, when the per‑share price established in an IRC §409A valuation does not match the price investors paid in a recent financing round. This difference can feel counterintuitive, especially when the company has just completed a successful raise and the preferred share price reflects strong investor interest. This article discusses why funding round and valuations differ.

In early‑stage and growth‑stage companies, it is common, and often surprising to founders, when the per‑share price established in an IRC §409A valuation does not match the price investors paid in a recent financing round. This difference can feel counterintuitive, especially when the company has just completed a successful raise and the preferred share price reflects strong investor interest.

Hypothetical scenario: A founder closes a Series A at $10.00 per preferred share. Shortly thereafter, the independent 409A valuation concludes that the fair market value (FMV) of common stock is $4.25 per share.

The immediate reaction is predictable:

• “Did the valuation firm get it wrong?”
• “Is our company worth less than investors think?”
• “Are we doing something risky by granting options at this price?”

The short answer: A mismatch between a 409A valuation and a fundraising price is not only common, but also often appropriate. Understanding why requires clarity around what a 409A valuation is designed to do, what a financing price represents, and how capital structure affects value allocation.

What IRC 409A Valuation Actually Measures

A 409A valuation is performed to determine the FMV of common stock for purposes of granting equity compensation under IRC §409A.

The standard of value applied is FMV, defined per Revenue Ruling 59-60 as:

The price at which property would change hands between a willing buyer and a willing seller, neither under compulsion to buy or sell, and both having reasonable knowledge of relevant facts.

Importantly:

• It is not the price negotiated by strategic investors
• It is not necessarily the last transaction price
• It is not a marketing number

It is a conclusion of FMV for common equity, typically on a minority, non-marketable basis. This means the valuation reflects the rights, restrictions, and risks associated with common stock, not preferred stock.

A stock option is exempt from §409A only if the exercise price is equal, or greater, than the FMV of the underlying common stock on the grant date. If the strike price is below FMV, §409A penalties may apply. (Apart, and aside, per GAAP accounting rules, the resulting option awards must still be recognized for book purposes under ASC 718.)

What a Fundraising Price Represents

A financing round price reflects:

• The price investors are willing to pay for preferred stock
• Negotiated terms and protections
• Management and investor expectations about future growth
• Competitive deal dynamics
• Strategic value

Preferred shares typically include:

• Liquidation preferences
• Conversion rights
• Dividend rights
• Anti-dilution protections
• Participation features

Common stock has none of these. So, when someone compares a preferred share price to a common stock 409A value, they are often comparing different securities with materially different rights.

Capital Structure Matters

Consider a simplified example:

• Investors purchase preferred shares at $10.00 per share
• The company has a 1x non-participating liquidation preference
• There is downside risk
• There is no guaranteed exit

In a downside scenario, preferred shareholders recover their investment first. Common shareholders receive value only after preferred capital is returned. A 409A valuation must account for that economic reality.

Valuation methodologies allocate enterprise value across equity classes based on their rights and participation across potential outcomes:

• Option pricing model (OPM)
• Probability-weighted expected return method (PWERM)
• Hybrid models

It is therefore common, and financially rational, for common stock to be valued at a discount to preferred stock.

Why the Gap Can Be Significant

Several factors can widen the spread between preferred price and 409A value:

1. Financing at an Aggressive Valuation

In competitive fundraising environments, pricing can reflect momentum and investor appetite rather than pure intrinsic value.

2. Early-Stage Risk

If the company has limited operating history or high volatility, downside scenarios meaningfully affect common equity.

3. Structural Preferences

Multiple liquidation preferences, participation rights, or stacked preferred rounds increase subordination risk to common.

4. Illiquidity

Common stock in a private company lacks a ready market. A discount for lack of marketability (DLOM) is typically applied.

When the Gap Becomes a Red Flag

While differences are normal, extreme discrepancies deserve scrutiny.

Red flags may include:

• A 409A value that exceeds the recent preferred price without clear justification
• A valuation that ignores material financing terms
• Significant company performance decline after financing without adjustment
• Using a financing price mechanically without allocation modeling

A 409A value that is materially overstated may distort compensation economics, whereas a 409A value that is artificially understated creates compliance exposure, audit scrutiny, and reputational risk. The role of the independent appraiser is not to validate the company’s narrative; it is to determine defensible FMV.

The Timing Issue

Another common driver of divergence is timing. For example, a financing may close in January based on Q4 projections. Whereas the 409A may be performed in April following:

• Updated financials
• Missed targets
• Changed market conditions
• Macroeconomic shifts

FMV is determined as of the valuation date, not retroactively tied to a financing. Clear documentation of the assumptions and economic context is therefore essential to explain the rationale for the opinion of value.

Secondary Transactions and Crowdfunding

Confusion often intensifies when secondary sales or crowdfunding campaigns occur at prices that differ from both preferred financing and 409A conclusions.

These transactions may:

• Involve small blocks
• Include marketing premiums
• Reflect limited diligence
• Occur between non-institutional participants

Such pricing is a data point, not a presumption of FMV. The valuation professional must assess whether those transactions reflect arm’s-length, informed market activity, or are influenced by structural features of the offering or informational asymmetry, including unequal access to material financial and operational information between the issuer and retail investors.

When Crowdfunding Says “X” and 409A Says “Y”

In crowdfunding campaigns, particularly under Reg CF (regulation crowdfunding)[1] or Reg A,[2] companies frequently market an offering based on an implied valuation of “X.” That number is often prominently displayed on the platform and becomes part of the company’s public narrative.

Shortly thereafter, the company may obtain a 409A valuation concluding that the FMV of common stock is materially lower, at “Y.” This difference can create discomfort internally and externally. However, these two figures often measuring fundamentally different economic realities.

A crowdfunding valuation may reflect:

• A negotiated or platform-implied pre-money valuation
• Investor appetite and marketing dynamics
• Limited diligence by retail investors
• Small minimum investment increments
• Aggregated participation through an SPV
• Optimistic forward-looking projections
• A price set for preferred shares, SAFEs, or convertible instruments

A 409A valuation, by contrast:

• Applies the FMV standard under Revenue Ruling 59-60
• Evaluates common equity specifically
• Considers downside risk and probability-weighted outcomes
• Allocates enterprise value across capital structure
• Applies DLOM
• Is performed for tax compliance purposes

Whether the crowdfunding instrument is preferred equity, common stock, or a convertible security, the offering price alone does not establish FMV of common stock for §409A purposes.

In many cases, crowdfunding investors are purchasing:

• Preferred shares with liquidation rights
• SAFEs with valuation caps
• Convertible notes
• Securities issued in small increments to non-institutional investors

Those instruments may carry economic characteristics that common stock does not.

Even when common stock is sold in a crowdfunding campaign, the transaction may not meet the conditions typically associated with arm’s-length FMV indicators:

• The investor base may be retail rather than institutional
• The transaction size may be small relative to enterprise value
• Information asymmetry may exist
• Pricing may be influenced by marketing positioning

The presence of a higher crowdfunding valuation does not obligate the valuation professional to match that number.

Instead, the appraiser must assess whether the transaction reflects:

• An orderly market
• Informed participants
• Comparable rights and restrictions
• A price unaffected by promotional influence

If those elements are not clearly present, the crowdfunding price may inform the analysis but will not dictate the conclusion.

The Appraiser’s Role

The 409A process is not an exercise in reverse-engineering a price to make option grants attractive.

A defensible valuation requires:

• Understanding of capital structure
• Review of financing documents
• Analysis of projections
• Assessment of risk factors
• Application of appropriate allocation models
• Documentation of assumptions

Independence and professional judgment are central. In today’s environment, where regulators, auditors, and acquirers scrutinize historical equity grants documentation quality matters as much as the number itself.

Why the Mismatch is Often Healthy

Paradoxically, a difference between preferred price and common FMV often signals that:

• Capital structure is being properly modeled
• Rights and preferences are being considered
• Risk is being appropriately weighted
• Illiquidity is being recognized

In other words, it suggests the valuation is doing what it is supposed to do. A 409A valuation is not meant to mirror investor enthusiasm. It is meant to determine FMV of common equity under applicable standards. In crowdfunding environments, the difference can appear especially stark because one number is publicly promoted while the other is prepared for compliance. The contrast may feel reputationally sensitive, but it is often structurally appropriate.

Final Thought

When a 409A and fundraising price do not match, the question is not: “Which one is correct?” The better question is: “Are we comparing the same security, under the same assumptions, as of the same date, with the same rights?” If the answer is no, the difference may not only be explainable, but it may also be entirely appropriate. For founders, CFOs, and counsel, understanding this distinction reduces confusion and strengthens governance. For valuation professionals, it reinforces a core principle: a FMV mismatch between a 409A valuation and a fundraising price is not only common, but also often appropriate. Understanding why requires clarity around what a 409A valuation is designed to do, what a financing price represents, and how capital structure affects value allocation. FMV is not a negotiated number. It is a defensible conclusion grounded in structure, risk, and economic reality.

In a subsequent article, I will explore the technical intersection of ASC 718 and ASC 820, examining how the GAAP fair value framework, including market participant assumptions, informs stock-based compensation measurements, and how 409A valuations, while grounded in tax law, frequently incorporate valuation methodologies consistent with those principles. I will also consider how these concepts intersect with emerging fundraising structures such as crowdfunding, where questions may arise as to whether transaction participants reflect the market participants contemplated under ASC 820.

[1] Reg CF was created under the Jumpstart Our Business Startups (JOBS) Act of 2012 and is governed by the SEC under Reg CF. Reg CF can raise capital from accredited and non-accredited investors.

[2] Reg A is a SEC exemption that allows private companies to raise capital from the public in a “mini public offering” without going through the full IPO process. It was expanded under the JOBS Act of 2012.

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Trisch Garthoeffner, ABV, CVA, MAFF, EA, MAcc, has 20+ years of experience in providing business valuation, financial forensic, and merger and acquisition consulting services. In 2020, she was elected to the NACVA Standards Board; in 2021, voted vice-chair; in 2022, voted chair; and is a current Executive Advisory Board advisor for the NACVA Standards Board. She is a past Florida state chapter president for NACVA, a current member of the NACVA exam task force, a board member and quarterly author for the QuickRead valuation periodical, a past treasurer of the Florida Academy of Collaborative Professionals, and a past vice-president of the Southwest Florida Chapter of Collaborative Professionals and current member. In 2024, Ms. Garthoeffner was nominated as a member of Business Valuation Resources (BVR) Leadership Council. On March 06, 2025, she will be in Washington DC with other NACVA representatives^[1] to testify regarding NACVA’s collective input regarding the Treasury Department’s proposed rule – Regulations Governing Practice Before the Internal Revenue Service. In her spare time, she enjoys spending time with her daughter, exercising, antiquing, and fostering animals.

Ms. Garthoeffner can be contacted at (239) 919-3092 or by e-mail to trisch@anchorbvfs.com.

[1] T.J. Liles-Tims and Dalton Hopper.