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Comment by gruez | Hacker News Reader

>Implied Value — Here’s how you get there. The two pieces of data that you need are:

>1. FMV per share — In general I recommend using the most recent investor price. If it’s been a long time since your last financing round then I recommend adjusting that FMV per share by a reasonable growth rate (either tied to revenue growth or the change in your 409a value).

>2. 409a value — This will most likely be the exercise price for the option grant. Since a 409a value is calculated at least once a year (and definitely along with a round of financing), it should be relevant for the calculation.

But if the 409a value is recalculated along with a round of financing, wouldn't FMV per share equal 409 value?

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The 409(a) valuation is the value of the common shares. They are generally valued at a discount to the preferred shares (or company valuation) due to the fact that the preferred shares have a pay back preference and the common are considered less liquid. The discount is generally higher (70-80%) during the early stages of a company when a liquidity event is less certain and the discount decreases over time.

In that case the calculation in the OP seems even more wrong?

>The difference between these two values is the “Implied Value per Share”

By subtracting the two values, you're getting the preferred shares premium, not the "implied value" of the options.

The proper name for "implied value" used in the OP is "intrinsic value"[1]. While it's possible for that to be present, it's probably negligible. At the very least, it's non-trivial to determine, and requires a lot of guesswork regarding the actual current value of the company. 409a valuations exist specifically to prevent giving employees compensation via the intrinsic value of an option (eg. apple issuing options with a strike price of $0.01). Most of the value of the option is in the time value, which is even harder to calculate.

[1] https://en.wikipedia.org/wiki/Valuation_of_options

OP isn't attempting to calculate any sort of actual market value for the options, the post just presents a method for determining how many options to grant employees by assuming:

* Investors recently paid FMV per share

* The employee's cost per share will be 409a_value

* The company is actually worth or grows into the current valuation

therefore

* Each share in the employee's grant is theoretically worth (FMV - 409a_value) to the employee

* This value can be used to determine how many shares to grant new employees given the % of base salary equity targets.

Another method might be to use different % of base salary targets and divide that equity value by the current 409a_value instead of the intrinsic value, or to offer flat % of ownership grants by role.

My understanding is that in most early-stage startups the 409a includes the cash in the bank and very little else (and is completely detached from the last fundraising round valuation, where investors are including the growth potential of the company).

409a is a fair market valuation effort, not a book value process.

If an arms-length investor invests at a $1M valuation, it’d be hard to argue that the FMV of the company is vastly different from that.

But the 409a is a valuation of the common stock and that preferred stock investor might have liquidation preferences or other terms that de-risk their investment compared to common stock.

Yep. 409a assigns common shares (your options are last money out) as 20-30% of investor's preferred shares (first money out) in seed-stage co's. Given today's giant series a/b that far outstripe their revenue, probably still high for most flashy co's.

Am curious if/when they typically meet. By the time a co switches to RSUs, sure, but when before then - enough fit for funding growth w/ < 2yr payback period?

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