Jul 3, 2020
If want to know the current value of a company that is traded on the public stock market (e.g. NYSE or NASDAQ), you can easily go online and look up the price that it is trading at. But that’s not the case with a private company. Rather, private companies rely on a 409A valuation to determine their Fair Market Value (FMV).
The FMV is the price per share that startup employees pay when they "exercise" their stock options (ISO, NSO). The FMV is determined on the day stock options are issued. This date is called the "Grant date".
Private companies who offer stock options to employees or other parties must first complete a 409A valuation to ensure they’re accurately pricing their stock. The FMV (also known as "strike price" or "exercise price") is the price per share that startup employees pay when they buy their stock options.
The 409A valuation, used to determine FMV, takes several factors into account, including:
The IRS requires that a 409A valuation is conducted by an independent appraiser to ensure fairness. Companies must complete a new 409A valuation each year or during major events like mergers, acquisitions, or a new round of funding. This means that at minimum a company must refresh it's FMV at least once per year.
As a result, when new employees are joining your startup after you, they may receive a different FMV or strike price for their option grants.
As a startup employee who receives stock options, you should understand how the price per share you are paying for your stock options is determined.
For questions about private stock options and fair market value, feel free to reach out to our team.