We closed our Series A at a $28 million post-money valuation. Two weeks later I sent an offer letter to our first VP of Engineering with an equity grant attached. Three weeks after that, our 409A valuation came back pricing our common stock at $1.10 a share, about a tenth of what she'd assumed her options were worth based on the round we'd just announced publicly. She was upset, and I didn't have a good answer ready. If your 409A valuation looks nothing like the number in your funding announcement, your round wasn't wrong and your 409A isn't broken. The two numbers measure completely different things, and the gap between them is usually 3x to 10x. Here's what I got wrong, and the framework I use now before any equity conversation.
Why a 409A and a funding valuation are never the same number
A 409A prices your common stock. Your funding round prices preferred stock, which carries liquidation preferences, anti-dilution protection, and board seats that common stock doesn't get. Preferred stock is structurally worth more per share, so a 409A almost always lands well below your last round's price per share, even on the same cap table on the same day.
At seed and Series A, that gap commonly runs 3x to 10x. Our $28M post-money round priced preferred stock at roughly $9 a share while the 409A priced common stock at $1.10. Both numbers were correct. They answer different questions: one is what an investor will pay for downside protection, the other is what an independent appraiser considers fair market value for the stock employees actually hold. 409A providers explicitly exclude preferred rights from the common stock number, which is why the discount exists by design, not by mistake.
The mistake I made
During recruiting, I told our VP of Engineering candidate her grant was worth about a million dollars, based on our post-money valuation and her share count. That number used the preferred price per share, not the strike price she'd actually pay to exercise. When her offer letter arrived with the real 409A-based strike price, the math didn't match what I'd said in the interview, and she reasonably wondered what else I'd gotten wrong. I hadn't lied. I'd quoted the wrong number, out of habit, because the funding valuation was the one everyone in the room already knew.
What it costs if you get this backwards
The more expensive version of this mistake runs the other way: granting options off a 409A that's too low or stale relative to true fair market value. If the IRS later decides your strike price didn't reflect real FMV, the spread gets treated as deferred compensation, taxed immediately as ordinary income, plus a 20% federal penalty and possible state penalties on top. That bill lands on the option holder, not the company, which is its own hard conversation to have with an engineer who trusted your numbers. A priced funding round is one of the specific events that should trigger a fresh 409A before your next grant, not a reason to keep using last year's.
How to talk about equity value without overpromising
Three changes I made after that conversation:
- Never state option value in dollars pegged to the last round's preferred price per share. It's the wrong number for what the employee is actually buying.
- Present two numbers instead: the share count or ownership percentage, and the actual strike price from the current 409A.
- Model a range of exit outcomes, such as 3x, 5x, or 10x company value, rather than a single dollar figure. Candidates remember the range, not the caveat.
This takes an extra five minutes per offer conversation, and it means nobody signs based on a number that quietly changes three weeks later.
The 30-day move
If you've just closed a round, order a new 409A before your next option grant goes out, don't wait for the annual renewal date. Then rewrite the equity section of your offer template to show share count and strike price side by side instead of a single dollar estimate. If you have offers currently open with candidates who haven't signed, have the conversation now, before their start date, not after their first paycheck.
Frequently asked questions
Why is my 409A valuation lower than my funding round valuation?
Because a 409A prices common stock and your funding round prices preferred stock, which carries liquidation preferences and other rights that make it worth more per share.
How much lower is a 409A usually compared to a funding valuation?
Commonly 3x to 10x lower at seed and Series A, though the exact discount depends on your preferred stock terms and cap table structure.
Do I need a new 409A every time I raise a round?
Yes. A priced funding round is one of the specific trigger events that requires a refreshed 409A before your next option grant, not just the annual update.
What happens if I grant options off a stale or too-low 409A?
The IRS can treat the spread between the strike price and true fair market value as deferred compensation, taxed immediately, plus a 20% federal penalty and possible state penalties, and that cost falls on the option holder.
Should I tell candidates the dollar value of their options during recruiting?
Not pegged to the last round's preferred price per share. Quote share count or ownership percentage plus the actual 409A strike price, and model a range of exit outcomes instead of one number.
The gap between your funding valuation and your 409A isn't a red flag. It's two appraisers answering two different questions correctly. The founders who avoid the awkward conversation are the ones who quote strike price and share count from the start, and save the big number for the exit scenario where it actually belongs.