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This brings up a good question. Companies have to price their options to employees at the "market value". They often make the exercise price the same as the preferred share sale price. Yet the options are for common shares.

How can a company know what these options or shares are worth when they aren't preferred-- because there is no market events for them?

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The common shares are priced through a 409a valuation, generally done by a CPA. And, actually, the common exercise price is almost NEVER the same as the preferred shares. In some cases, it is 90% lower.

Exactly. We went through the 409A process for the first time a couple of years back and the valuation firm will typically take the preferred price (assuming there's been no secondary sales of common) and then apply discounts for lack of liquidity etc which gets you anywhere from 70-90% lower than the cost of preferred. The valuation firm usually comes in conservative and then you negotiate the FMV down. Assuming you haven't raised any more money, subsequent 409As are a lot quicker with a pretty light touch from the valuation firm.

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