Pre-IPO 409A Valuations

The gap to the preferred price narrows

A discount for lack of marketability exists because private shares cannot be freely sold, and a liquidation preference sits ahead of common in every outcome. Both ease as a listing approaches: a shorter expected holding period narrows the discount, and in the IPO scenarios the model now weights most heavily, preferred stock typically converts to common and shares ratably with it. Together these pull common stock value toward the preferred price, though a gap normally remains until the offering prices.

Cheap stock scrutiny

Auditors review whether option grants in the periods before an IPO were priced at fair market value. Where grant-date valuations look low relative to the eventual offering price, the company may face a cheap stock charge. Well-documented, regularly refreshed valuations are the defense.

Refresh frequency increases

Quarterly refreshes are common in the year or two before a listing, because value moves quickly and each grant needs a current supportable price. Every report includes your first 2 hours of audit support, so if an auditor or the IRS asks how a number was derived, someone who worked on it answers.

Frequently asked questions

What is a cheap stock charge?

It is additional stock compensation expense recognized when auditors conclude that options were granted below fair market value in the periods before an IPO. It is avoided by refreshing valuations regularly and documenting the basis for each grant-date price.

How often should we refresh before an IPO?

Quarterly is common in the 12 to 24 months before a listing, and more frequently around material events. The goal is that no grant is ever priced off a stale valuation.

Why is our 409A still below the expected IPO price?

Because it values common stock today, as a private illiquid holding, weighted across outcomes that include the company not going public. The expected offering price assumes a successful listing, which is only one scenario.