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Finance Glossary

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409a Valuation


409a valuations set the price of the common stock generally after preferred stock has been purchased by the investing angel or venture capitalist. Preferred stock might have been purchased for a dollar a share—but once preferred stock has been sold by the company, it has to be paid back first before common stock has any value. 

So imagine an extreme situation where a company which just started last week raises $80 million in preferred stock. The odds that the full $80 million is ever even paid back is probably low so it wouldn't be crazy to see the common stock valued at almost zero/nothing. Employees get stock options in common stock—not preferred—so somebody has to set the strike price for the options on their common. That's the purpose of the 409a valuation—it sets the price at which common stock options can be bought and thus converted from options into actual stock ownership.