If you’ve ever assumed your new fundraising valuation should match your 409A valuation, you’re not alone. Many founders assume both numbers reflect the company’s worth, and the confusion is understandable. Both valuations involve your equity and often occur around major milestones.
But the methodology, purpose, and consequences of getting them wrong are fundamentally different.
A 409A valuation and a company (VC) valuation measure different things, for different stakeholders, using different approaches. That’s why the numbers rarely align — and, more importantly, why they shouldn’t.
Understanding the distinction helps founders make better decisions when issuing equity, planning grants around fundraising, and keeping their company’s valuation defensible over time.
>> For a deeper breakdown of valuation methods and safe harbor rules, you can also download our 409A Valuation Guide.
What is a 409A Valuation? And Why Does it Matter?
A 409A valuation determines the fair market value (FMV) of your company’s common stock. It’s used primarily to set the strike price of employee stock options and to maintain IRS compliance.
A defensible 409A valuation:
- Establishes FMV for common stock
- Protects employees from unexpected tax consequences
- Helps your company qualify for IRS safe harbor
- Creates a clear audit trail for diligence and future fundraising
Because it’s tied to IRS requirements, a 409A valuation should come from a qualified, independent third-party provider. It’s typically refreshed every 12 months or after a material event such as a fundraising round.
>> If you need a refresher, visit: What Is a 409A Valuation and Why Does It Matter?
How Company Valuation Fits In
It’s easy to confuse a 409A valuation with a company valuation, but they serve very different purposes. A company (or investor) valuation reflects the negotiated price of preferred stock in a financing round — a price shaped by investor rights such as liquidation preferences, anti-dilution protections, participation rights, and board influence.
That valuation also reflects negotiation dynamics: the competitiveness of the round, investor expectations, and market conditions. These factors increase the value of preferred shares, but they don’t determine the fair market value of common stock used for option pricing.
This is why a fundraising valuation cannot be used as FMV for employee equity — and why relying on it can result in non-compliant or inaccurately priced grants.
How 409A Valuations Differ from Company Fundraising Valuations
Founders often assume their 409A valuation should mirror their fundraising valuation. In practice, treating the two as interchangeable can lead to mispriced option grants, compliance issues, and confusion among employees. Understanding where these valuations diverge, and why, is essential for setting strike prices correctly and keeping your equity strategy on track.
Below are the most important differences founders should understand:
Stock Type: Common vs. Preferred
Preferred stock often includes protections such as:
- Liquidation preferences
- Anti-dilution rights
- Voting power
- Participation rights
Common stock does not include these negotiated terms and is typically less liquid and higher risk. In simple terms, a 409A valuation determines the FMV of common stock, while a fundraising valuation prices preferred stock — two classes with fundamentally different rights and economics.
Because the two stock classes represent different economic rights, their valuations are not expected to match.
Purpose: Tax Compliance vs. Negotiation
A 409A valuation exists to determine a defensible FMV for common stock, so equity grants remain compliant.
A fundraising valuation exists to determine ownership percentages, investor protections, and deal structure.
Investors negotiate based on expected returns and market dynamics. 409A valuation providers work within IRS methodology, safe-harbor standards, and documentation requirements. Aligning the two can create compliance risks, inflated strike prices, or misaligned expectations with employees and investors.
Timing and Frequency
409 valuations:
- Required annually or after major business events
- Account for current financial data, market comps, and capital structure
- Must meet IRS standards to maintain safe harbor
Fundraising valuations:
- Occur only during new financing rounds
- Reflect negotiation conditions at that specific moment
Why the Numbers Rarely Align
These differences culminate in valuations that almost never match in practice. A 409A valuation incorporates discounts on illiquidity and marketability, adjustments for capital structure, comparable company data, and the company’s current risk profile. Investor valuations, meanwhile, are shaped by negotiation dynamics — including preferred rights, investor competition, and market sentiment at the time of the financing.
Because each valuation is built for a different purpose and uses different inputs, the gap between them is expected. Recognizing this helps founders avoid forcing their 409A valuation to “fit” their fundraising number and instead focus on maintaining accurate, defensible FMV for their option grants.
Why it Matters for Founders:
Here’s where the differences become operationally important.
Treating your 409A valuation like a fundraising valuation can lead to:
- Option strike prices that are too high
- Delayed grants during hiring cycles
- Loss of safe harbor protection
- Employee confusion or reduced perceived value
Instead, founders should approach each valuation with its specific purpose in mind.
Three practical steps to consider:
- Plan your 409A timeline around fundraising: Update your 409A shortly after a new round so option grants reflect accurate FMV.
- Communicate clearly with employees: Help them understand why common stock FMV differs from preferred stock pricing in a term sheet — especially after a new raise.
- Choose a defensible, independent valuation provider: Safe harbor depends on credible methodology, documented assumptions, and independence. Algorithm-only valuations often lack the qualitative detail needed for audit readiness.
>> For a deeper explanation of methodology and compliance, download our complete 409A Valuation Guide for Startups.
How a Fundraising Valuation Compares to a 409A Valuation in Practice
Imagine your company raises a Series A at $10 per preferred share.
A defensible 409A valuation may determine FMV of common stock at $2.50 per share, reflecting:
- Lack of investor protections
- Higher risk
- Lower liquidity
- Discounts for marketability
- Capital structure adjustments
This pattern persists across later rounds. In Series B or C, preferred-share prices often increase as investors add more capital and negotiate additional rights. But common-stock FMV remains lower because the underlying economics — risk, liquidity, and rights — still differ. The spread between the valuations is normal at every stage of growth, not a one-time occurrence.
If you set option strike prices using the preferred-share value instead of FMV:
- Employees may hesitate to exercise
- Compensation expenses may be overstated
- Auditors or the IRS may challenge the valuation
- The company risks losing safe-harbor protection
- Board approvals for grants may need to be revisited
Here’s the key point: The gap between valuations reflects different classes of stock, each with its own rights, risks, and economic position — not an error in the valuation. Understanding that distinction helps ensure your equity strategy stays compliant and aligned with how your cap table actually works.
Protect Your Equity and Plan Ahead
409A valuations and venture valuations serve different roles. Mixing them up can lead to mispriced options, compliance issues, and misalignment with your team or investors.
A proactive approach can help you stay ahead:
- Treat 409A valuations as recurring compliance checks
- Update them after material events
- Integrate them into fundraising planning
- Use independent providers for defensible FMV
- Centralize your documentation for audits and diligence
If you’d like support navigating your next 409A valuation, the Fidelity Private Shares team can help.
Ready to plan ahead with confidence? Talk with our team to understand how your next 409A valuation fits into your broader equity strategy. Schedule a demo with Fidelity Private Shares
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