For options when joining a startup
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- Facebook WhateverrsA 409a valuation is done, typically by a third party. The strike price is set to what the third party estimates the range in which the shares would likely trade in a normal arms length transaction, and typically uses the lower end of the justifiable range. It's updated periodically (I think annually but not sure). You can't really issue incentive options without either having publicly trading shares or doing a 409a valuation.
- New / Mgmt uNNd52A third party issues a 409a valuation. They usually come in at 20-40% of the latest equity round. (The rationale being equity investors have preferred shares, which entitle them to a liquidation preference the common shareholders do not have)
It’s a bizarre process where after trying to raise as much money at the highest valuation possible, the CEO now tries to negotiate the lowest valuation possible.
A 409a is refreshed once per year, or sooner if there’s a fundraising event.