409A Valuation for Investors: Why It Is Not Your Mark

A 409A valuation for investors is not a mark. Carta’s August 4, 2026 founder guide and Pulley’s June 4, 2026 CFO guide both define a 409A as an independent appraisal of a private company’s common-stock fair market value, used to set the minimum strike on employee options under IRC §409A. That is a strike-price safe harbor, not the preferred price from the last round and not SAFE cost basis. If a founder forwards the report, file it. Do not paste the common FMV onto the position you hold.

What a 409A valuation actually prices

Carta’s purpose line is narrow: the report values common stock so the board can set a strike at or above fair market value when it grants options. Pulley says the same — FMV is what a buyer would pay for a share of common today, not what investors paid for preferred. Pillsbury’s September 9, 2024 explainer puts the tax hook in statute language: an option is generally exempt from §409A if it is an option on common stock of the service recipient and the exercise price is not less than FMV on the grant date. In-the-money grants lose that exemption.

If the exemption fails, the penalty sits on the service provider, not on your cap table. IRC §409A(a)(1)(B) adds 20 percent of the amount required to be included in gross income, plus interest; Redwood Valuation (July 20, 2026) matches the statute’s premium interest at the underpayment rate plus one percentage point. Pillsbury notes California levies an extra 5 percent. None of that is a NAV instruction for preferred or a SAFE. Morse (June 16, 2014) is explicit about what the 2005 guidance killed: loosely discounting the last preferred price by “stage of development” to pick an option strike.

Why common FMV is not the round price

Carta splits the two numbers. A fundraising valuation is the price investors pay for preferred stock, which usually carries liquidation preferences and other rights. A 409A values the common shares held by founders and employees, and it is usually lower. After a priced round, Carta says providers typically use an option-pricing-model (OPM) backsolve: treat the new-money preferred price as an arm’s-length input, allocate equity value across classes, then apply a discount for lack of marketability (DLOM). Carta’s typical DLOM range for a standard holding period is 25 percent to 35 percent. That discount, plus junior rights, is why the 409A is almost always below the last fundraising valuation.

Pulley’s FAQ is the investor-facing test: a 409A sets common FMV for IRS compliance; an investor valuation is what you pay for preferred. “The two numbers should always differ. If they’re identical, that’s a red flag.” The same guide tells boards not to reuse a prior number or estimate a strike from the preferred price. Pillsbury tells founders who want a “high” 409A that they are mixing securities: options sit on common; venture checks sit on preferred. Carta flags the fraction myth too: treating 409A as a simple percentage of the last round is not a method. Do not invent a common-to-preferred ratio in your spreadsheet.

Raziel’s guide to startup valuation methods and the startup valuation calculator are for pre-money and post-money round math — ownership, dilution, price per preferred share. That is Carta’s fundraising column, not the 409A column.

How long the strike-price safe harbor lasts

Treasury Regulation §1.409A-1(b)(5)(iv)(B): an independent appraisal that meets the §401(a)(28)(C) standard, as of a date no more than 12 months before the relevant transaction (the regulation’s example is the option grant date), is presumed reasonable unless the IRS shows the method or its application was grossly unreasonable. A previously calculated value is not reasonable later if it fails to reflect information that may materially affect the corporation’s value — examples include the resolution of material litigation or the issuance of a patent — or if the calculation is more than 12 months old.

Carta’s operating rule matches: valid for a maximum of 12 months from the effective date, or until a material event, whichever comes first. Carta’s material-event list includes closing a financing (priced round, SAFE, or convertible note), a credible acquisition term sheet, a major change in financial projections, and a strategic partnership that changes the business. Pillsbury’s list is non-exhaustive and still starts with financing rounds, including convertibles and SAFEs. A refresh after the round you just closed is for the company’s next option grants, not a restatement of what you paid.

Cost is a company compliance line, not a quality score for your mark. Carta (August 2026) puts standalone reports at $1,000 to over $10,000 depending on size and complexity, and says 409As are included in a Carta cap-table subscription. Pulley’s June 2026 stage table — typical market ranges, not quotes — lists pre-seed/seed at $500–$1,500, Series A–B at $2,000–$5,000, and Series C+/pre-IPO at $5,000–$15,000+.

Do not overwrite preferred or SAFE cost basis

Keep three fields. Do not collapse them into one “value” cell: cash and cost basis (the dollars you wired, the date, and the instrument); round price (the last preferred price or post-money — a negotiated headline, not a quoted NAV); and 409A common FMV as an optional document field — valuation date, per-share common FMV, provider name. Attach the PDF. Do not multiply that FMV by your preferred share count.

If you overwrite the SAFE or preferred row with the 409A FMV, every IRR and MOIC that uses that cash is wrong, and you have mixed a strike-price safe harbor with an investor position. The same rule applies if you hold converted preferred that started as a SAFE: close the SAFE, open preferred, keep the original cash history. The 409A does not move either row.

Raziel’s startup investment tracker keeps instruments, cash dates, and documents in one book next to IRR and unrealized gains. Raziel is not a 409A valuation provider and does not set FMV. Leave the common-stock appraisal in the document stack and off the cost-basis line.