These get conflated constantly, usually by founders who have been quoted for one and need the other. They share a vocabulary and almost nothing else: different purpose, different reader, different consequence for getting it wrong.
The 2 exercises
A 409A valuation determines the fair market value of a US company’s common stock, so that employee options can be granted at a defensible strike price. Its purpose is tax compliance. Its reader is the IRS, in the event anyone ever looks.
A business valuation determines what the enterprise is worth, for a commercial purpose: a sale, a raise, a partner buyout, or internal planning. Its reader is a counterparty across a table.
The same company can carry a 409A common-stock value far below its last preferred round price and both figures can be entirely correct, because they are valuing different instruments under different assumptions.
| 409A valuation | Business valuation | |
|---|---|---|
| Values | Common stock, per share | The enterprise, or equity in it |
| Purpose | Option strike price, tax compliance | Negotiation, planning, a transaction |
| Reader | The IRS | A buyer, investor or partner |
| Cadence | Every 12 months, or after a material event | When you need it |
| Applies to | US corporations granting options | Any company, any jurisdiction |
| Consequence of error | Tax penalties for employees | A worse price |
| Who provides it | 409A specialists and cap-table platforms | Advisory and valuation firms |
Why the numbers differ so much
A preferred round prices preferred shares, which carry liquidation preferences, participation rights and often anti-dilution protection. Common stock carries none of those. A 409A analysis applies a discount for that difference and a further discount for lack of marketability, because the shares cannot be sold.
The result is routinely a fraction of the preferred price. This is normal and expected. It is not a claim that the business is worth less than the round implied.
A 409A prices what an employee is actually being given. A business valuation prices what an owner is actually selling.
When you need a 409A
- You are a US corporation and you intend to grant stock options.
- Your last valuation is more than 12 months old.
- Something material has happened since: a priced round, a significant acquisition offer, a large change in performance.
The safe harbour matters. A 409A produced by a qualified independent provider shifts the burden of proof if the IRS challenges the strike price. A number you calculated yourself does not, and the exposure lands on your employees rather than on the company.
When you need a business valuation
- You are selling, or fielding an unsolicited approach.
- You are buying, and need a view independent of the seller’s.
- A shareholder is exiting and both sides need an independent figure.
- You want to know what actually moves enterprise value before spending 2 years moving something else.
What we do and do not do
We produce commercial business valuations: 3 methods, cross-checked, written report in 10 business days, from $2,500. We do not produce 409A valuations. That is a specialist product with its own safe-harbour requirements, and the established providers are cap-table platforms and dedicated 409A firms.
We are also not certified appraisers. If your number has to satisfy a court, a tax authority or a regulator, you need a licensed appraiser, and we will tell you that on the first call.
Which one you are actually being asked for
One question settles it: who is going to read this, and what do they do with it? If the answer involves granting options to employees, it is a 409A. If it involves a person deciding what to pay you, it is a business valuation. If it involves a filing, it is neither, and you need an appraiser.