Process and Methodologies

Explained: Why Is Your 409A Valuation Lower Than Your Post-Money Valuation?

If your 409A valuation came in much lower than your post-money valuation, you are not alone. This article explains why the two numbers are supposed to be different, what drives the gap, and why a lower 409A is actually good news for your employees.

By 409.ai team - 2025-07-11

If you have ever compared your company's 409A valuation to its post-money valuation and wondered why the numbers look so different, you are not alone. This is one of the most common questions founders and employees ask when they first encounter both figures side by side. The short answer is that the two valuations are measuring different things entirely, and the gap between them is not only normal but expected. This article breaks down what drives that difference and why it matters for your business and your team.

Two Valuations, Two Different Purposes

Before diving into the reasons for the disparity, it helps to understand what each valuation is actually measuring.

A 409A valuation is an independent appraisal of the fair market value (FMV) of a company's common stock, conducted to comply with IRS regulations and set the strike price for employee stock options. It is focused strictly on what the common stock is worth today, using conservative, IRS-defensible methodologies.

A post-money valuation is the total value assigned to a company immediately after a funding round, calculated by adding the new investment to the pre-money valuation. It is based on the price investors paid for preferred shares during that round and is essentially a negotiated figure reflecting growth expectations, not a formal appraisal.

Both numbers can be simultaneously accurate because they are answering completely different questions about completely different securities.

The Core Reason: Common Stock vs. Preferred Stock

The single biggest driver of the gap between a 409A valuation and a post-money valuation is the difference between common stock and preferred stock.

When investors participate in a funding round, they receive preferred shares, which come with a range of protections and rights that common stock does not have. These typically include liquidation preferences (investors get paid first if the company is sold), anti-dilution clauses, and in some cases board seats or veto rights. Because of these advantages, preferred stock is inherently more valuable than common stock.

The post-money valuation is calculated based on the price investors paid for those preferred shares. It effectively treats all shares in the company as if they were worth the same as those preferred shares, which significantly inflates the total figure.

A 409A valuation, by contrast, applies discounts to reflect the fact that common stock carries more risk, lower liquidity, and none of the protective rights that preferred shares hold. This is why the common stock price in a 409A valuation is typically around 25% to 35% of the price that investors paid for their preferred shares, even when both valuations are performed at the same point in time.

Other Factors That Contribute to the Gap

Beyond the common vs. preferred stock distinction, several other factors widen the difference between the two valuations.

Time horizon and growth expectations

Post-money valuations are inherently forward-looking. Investors factor in growth potential, not just current numbers, and often assume aggressive year-over-year growth. A 409A valuation, on the other hand, is grounded in the company's current financial performance and uses conservative, defensible projections. It reflects where the company is today, not where investors hope it will be in three to five years.

Funding round terms

The terms negotiated during a funding round can significantly inflate the post-money figure. High valuations, convertible notes with beneficial conversion features, or particularly favorable investment terms can all push the post-money number up in ways that the 409A methodology does not replicate.

Market conditions and investor confidence

Post-money valuations often reflect the competitive dynamics of a fundraising process, including how many investors were interested and how much leverage the founders had in negotiations. A 409A valuation does not capture investor sentiment or market momentum in the same way. It sticks to observable financial data and comparable market evidence.

What This Means in Practice

For employees receiving stock options

A lower 409A valuation is actually good news for your team. Because the 409A sets the minimum strike price for stock options, a lower FMV means employees can buy shares at a lower price. If the company is eventually acquired or goes public at a higher valuation, the gap between the strike price and the exit price represents the potential gain. A lower 409A is not bad news. It means lower strike prices for employees, which translates directly into greater upside when the company exits.

For fundraising and investor relations

When presenting both figures to potential investors or new hires, it is important to explain the distinction clearly. The post-money