A 409A is not your fundraising valuation

What founders do, and why it fails

The instinct is to carry one "company is worth X" figure around and reach for it whenever anyone asks about value. During a raise that figure is the round price, because that's the number you're living inside. So when an option question lands, the round number comes out.

The failure is that the round number describes preferred stock, and an employee's option is on common stock. Preferred carries rights that common does not: liquidation preference, sometimes participation, often a board seat, anti-dilution protection, information rights. Investors pay up for those rights. Common stock has none of them, so it is worth less per share, and a third party has to say how much less. That third party is the 409A appraisal.

So the round price answers "what will an investor pay for protected shares right now," and the 409A answers "what is a share of bare common stock worth for the purpose of setting a fair strike price." Quote the round price as the strike basis and you've told an employee their cheap options are expensive. Quote the 409A as your fundraising valuation and you've told an investor you're worth a third of what you're asking. Neither is a small slip.

The framework: two prices, two jobs

Hold the two apart by what each one is for.

The 409A valuation exists to protect employees and the company from the IRS. Under Section 409A of the tax code, options have to be granted at a strike price no lower than the fair market value of common stock on the grant date. Price them too low and the IRS can treat the discount as deferred compensation, with penalty taxes landing on the employee. To get a defensible number, you pay an independent appraiser, who issues a report that gives you "safe harbor": the IRS presumes your strike price is reasonable unless they can show the appraisal was grossly wrong. That report is the entire point. It is a compliance artifact, not a fundraising figure.

The fundraising valuation exists to set ownership in a financing. It's the pre-money or post-money you negotiate with an investor, and it prices the preferred shares they're buying. Nobody appraises it. It's the outcome of a negotiation, anchored on traction, market, comps, and how much the investor wants in. It's the number on the term sheet, not in any compliance file.

Because common stock lacks the rights preferred carries, the 409A common-stock value usually lands well below the preferred price per share, especially early. The gap is widest at seed, when the preference and control rights are doing most of the work, and it narrows as the company matures toward a liquidity event and common starts to look more like preferred. The exact ratio is the appraiser's job, not a rule of thumb you should quote, but the direction is reliable: common is worth less than preferred, often a lot less, early on.

The two prices, side by side

Same company, same week. One number is being negotiated, the other appraised.

The row that causes the most live confusion is "who buys at this price." An employee exercising options is buying common at the 409A strike. An investor is buying preferred at the round price. When a founder answers a strike-price question with the round price, they've crossed those two rows, and the engineer in the example walks away thinking their options cost four times what they do.

When you need a 409A

The trigger that catches founders off guard: you need a 409A before you grant the first option, not when you feel ready to. Specifically:

1. Before your first option grant. No grants until you have a current appraisal to set the strike. Granting first and pricing later is how you end up with options struck below fair market value.
2. After a priced round. A new financing is a material event. It moves the common-stock value and usually invalidates the old 409A, so you refresh.
3. Roughly every 12 months. Safe harbor from an appraisal lasts about a year. Past that, the report goes stale and the presumption of reasonableness weakens.
4. On a material event between rounds. A big new contract, an acquisition offer, a major pivot, anything that changes what the company is worth can require a refresh before the next grant.

A SAFE is the gray zone founders ask about most: it isn't a priced round, so it doesn't automatically trigger a refresh the way a Series A does. But it's still a fact about value, and once it converts or once you price, the picture changes. This is the kind of question to put to your provider rather than answer from a blog.

Founder misconceptions to drop

• "Our 409A is our valuation." It's the appraised value of common stock for option-pricing, not what the company is worth in a raise.
• "A higher 409A is good, it means we're worth more." A higher 409A raises the strike price on every future option, making them more expensive for the employees you're trying to attract. Founders often want the 409A conservative, not high.
• "We just raised at $20M, so options strike at $20M." No. Options strike at the common-stock 409A value, which is lower, because options are on common, not preferred.
• "We did a 409A last year, we're covered." Safe harbor lapses around twelve months and a priced round resets it. An old report on a freshly funded company is not a defensible strike basis.
• "The 409A and the round price should match." They shouldn't, early on. If an appraiser put common at the full preferred price, that would ignore the rights preferred holds and the discount common deserves.

The artifact above is the tool

The comparison table is the thing to keep where you can reach it under pressure. When a strike-price or valuation question lands, run the answer through one filter before you speak: which security are they asking about? Common stock and an employee means the 409A. Preferred and an investor means the round price. That single check stops the most common misquote.

Pair it with one operating habit: write down both current numbers, with their dates, in the same place. The 409A common-stock value and its appraisal date. The last round price and its close date. When the two are side by side with dates attached, "wait, which number is current and which security is it for" stops being a thing you reconstruct mid-call.

Keep both numbers, and their context, searchable

The reason founders mix these up live is that the two numbers live in different places. The 409A is a PDF from a provider in your email. The round price is in a term sheet, a SAFE, a cap-table tool, and a few investor threads. By the time someone asks, you're pulling the right figure from memory under time pressure, which is when the swap happens.

RoundOS keeps the financing and admin context the round already generates, the appraisal report, the signed instruments, the email where a price was agreed, retrievable as round context instead of scattered files. So when an employee asks about strike price or an investor asks about valuation, you can see which number is current, what it's for, and when it was set, before you answer. The numbers themselves still come from your provider and your term sheet. The point is not losing track of which is which.