- Jason Andrews
Post-Money Value vs 409A Valuation
“Why is the value of our company lower in the 409A Valuation report than the post-money value determined by our investors?”
First, great question! It’s an indication that you have firm grasp on the 409A Valuation and anticipating potential questions/concerns from other parties. Second, this is a very common question we receive and one we should be able to address with a brief explanation.
Ultimately the 409A Valuation and post-money value calculation are intended for two completely different purposes and differ in level of complexity, but both are the right tool for the jobs at hand. The purpose of the post-money value is to convey the terms and price of the to-be-issued preferred stock in a financing round while the purpose of the 409A Valuation is to estimate the Fair Market Value (standard of value defined by the IRS) of common stock.
As we all know, the post-money value is simply the product of (1) the purchase price of the new preferred stock and (2) the post-financing fully-diluted shares. While the post-money value (and corresponding pre-money value) is a helpful figure in the negotiation process, its less helpful for determining the value of common stock in the 409A Valuation as it does not reflect the differences in the economic rights of the preferred and common stock (each is assumed to be the same value). Thus, the 409A Valuation, which estimates the differences in value of preferred and common stock based on those economic rights, will result in a lower aggregate equity value as not all classes of preferred and common stock will be valued at the purchase price of the new preferred stock.
While the post-money value is not utilized as an input or otherwise reconciled in the 409A Valuation, the purchase/issue price of the new preferred stock is considered to be an indication of the market value and the 409A Valuation is typically reconciled with that particular data point of the transaction. Using a technique for quantifying the differences in economic rights of each class of preferred and common stock (referred to as an allocation method), the equity value is “back-solved” such that the value being allocated to the new preferred stock is consistent with the purchase price.
Please check out our Overview of a 409A Valuation for further explanation of the techniques used in a typical valuation.