409A Valuation Report Explained - What's Included and How to Read It

You've paid for your 409A valuation, waited a week or two, and now you've got a PDF sitting in your inbox. It's probably 20-40 pages long, full of financial tables and technical language. Let's break down what you're actually looking at and what matters most in your 409A valuation report.

The One Number That Matters Most

Before we dive into the full report, let's get to what you're really here for: the fair market value per share of your common stock.

This number - usually on page 2 or 3 - is your strike price for stock options. It's the price employees will pay to exercise their options, and it's what the IRS cares about for tax purposes.

Everything else in the 409A valuation report exists to support and justify this number. But that doesn't mean you should ignore the rest - understanding how they got there matters, especially if you ever get questioned about it.

Main Components of a 409A Valuation Report

Executive Summary

The first few pages give you the headline findings:

• Fair market value per share (the money number)
• Valuation date
• Brief overview of the company
• Summary of valuation methodology used
• Key assumptions that drove the valuation

This is the section you'll reference most often. If your lawyer, accountant, or potential acquirer asks about your 409A valuation, you'll be pulling numbers from here.

Company Overview and Financial Analysis

This section proves the valuation firm actually understands your business:

• Description of your products or services
• Business model and revenue streams
• Market opportunity and competitive landscape
• Historical financial performance
• Projected financial performance
• Key operational metrics

They're not writing a business school case study here - they're documenting the context that informs the valuation. If something looks wrong or outdated, flag it now. You don't want inaccuracies in the official record.

Valuation Methodology

Here's where things get technical. The 409A valuation report will explain which valuation methods they used and why. For most early-stage companies, expect to see:

Market Approach: Comparing your company to similar publicly traded companies or recent transactions. They'll look at valuation multiples (revenue multiples, EBITDA multiples, etc.) and apply them to your financials.

Income Approach: Projecting your future cash flows and discounting them back to present value. This matters more as you scale and have more predictable revenue.

Asset Approach: Looking at the value of your assets minus liabilities. This is rarely the primary method for tech companies but might be mentioned.

The report should explain why they weighted certain methods more heavily than others. For a pre-revenue startup, they might lean heavily on the market approach. For a profitable, growing company, the income approach carries more weight.

Capital Structure and Stock Allocation

This is where they break down all the different classes of stock in your cap table:

• Common stock (employees and founders)
• Preferred stock (investors), often multiple series
• Stock options and warrants
• Convertible notes or SAFEs

They'll explain the rights and preferences attached to each - liquidation preferences, participation rights, conversion ratios, etc. This matters because preferred stock is worth more than common stock, and the 409A valuation report quantifies that difference.

The allocation analysis shows how proceeds would be distributed to each class of stock under various exit scenarios. This helps justify why common stock is valued lower than the preferred stock price from your last funding round.

Discount Rates and Assumptions

The valuation firm will document all the key assumptions they made:

Discount for Lack of Marketability (DLOM): Your stock can't be easily sold, so it's worth less than freely tradable stock. Expect discounts of 20-40%, depending on how close you are to a liquidity event.

Discount for Lack of Control (DLOC): Common stockholders don't control the company, so there's often an additional discount (usually 10-30%).

Volatility assumptions: How risky is your company? Higher risk = lower valuation.

Exit timing: How long until a likely liquidity event? Longer timeframes = more discounting.

These assumptions have a massive impact on the final fair market value, so it's worth understanding them. If you think they're off-base, you can discuss with the valuation firm - though they need to justify their choices to withstand IRS scrutiny.

Comparable Company Analysis

If they used a market approach (most common for early-stage startups), you'll see detailed tables of comparable public companies:

• Which companies they selected and why
• Key financial metrics for each
• Valuation multiples (EV/Revenue, P/E ratios, etc.)
• How they adjusted these comparables for your company

Sometimes founders disagree with the comparables chosen - "We're not like that company at all!" But remember, they're not looking for perfect matches, just reasonable benchmarks in your industry.

Sensitivity Analysis

Good 409A valuation reports include scenarios showing how the valuation would change if key assumptions were different:

• "What if revenue growth is 20% higher or lower?"
• "What if the exit timeline is 6 months sooner or later?"
• "What if market volatility increases?"

This isn't just academic - it shows that the valuation firm thought critically about the uncertainties and that the final number is reasonable under a range of scenarios.

What Often Gets Overlooked in 409A Reports

The Effective Date

Your 409A valuation is only valid for 12 months from the effective date. After that, you need a refresh. Also, if you grant stock options dated before the effective date, you can't use that 409A - you'd need a retroactive valuation.

Material Events Trigger

The 409A valuation report usually includes language about what constitutes a "material event" requiring a new valuation. Keep this handy because you'll need to reference it when deciding whether that bridge round or big partnership deal means you need a refresh.

Professional Standards Disclaimer

There's usually language about the standards and assumptions used, and what the valuation can and can't be used for. Read this at least once - it explains the limitations of the report.

Red Flags to Watch For

Outdated information: If they're using financials from 9 months ago or referencing employees you haven't had in years, push back.

Misunderstanding your business model: If the company description doesn't sound like your company, that's a problem. The 409A valuation is only as good as the underlying understanding of your business.

Unexplained jumps or drops: If your valuation is radically different from last time (in either direction) without a clear explanation, ask questions.

Copy-paste errors: Finding references to the wrong company name or industry? That suggests they're using templates without proper quality control.

Using Your 409A Valuation Report

You'll reference your 409A valuation report in a few situations:

Granting stock options: You'll use the per-share price when creating option grants in your equity management system.

Board meetings: The board typically needs to review and approve the 409A valuation before granting options.

Due diligence: Investors, acquirers, and auditors will want to see your 409A valuation reports during their review.

Tax questions: If the IRS or state tax authorities ask about stock option grants, your 409A report is your documentation.

Keep your reports organized and easily accessible. You'll be referring back to them more than you think.

The Bottom Line

A 409A valuation report might look intimidating with all its financial jargon and technical methodology, but at its core, it's a well-documented answer to one question: "What's a reasonable price for our common stock?"

You don't need to become a valuation expert, but understanding the major components of your 409A valuation report helps you:

• Spot potential issues before they become problems
• Have intelligent conversations with your valuation provider
• Explain the valuation to your board and employees
• Defend it if anyone questions it down the road

Take 30 minutes to actually read your 409A valuation report when it comes in, not just file it away. Future you will appreciate having a handle on what's in there.