409A valuation is a method of valuing a private company based on its securities, generally including common stock, preferred stock, and convertible securities. 409A valuations typically occur when a private company is planning to go public or get acquired, although valuation reporting comes into play at other points in a startup’s lifetime as well.
The process for performing a 409A Valuation generally involves the following steps:
(i) Determine the type of security being valued;
(ii) Gather financial and other relevant information;
(iii) Identify comparable companies and transactions;
(iv) Estimate the discount or premium to apply to comparable company/transaction data;
(v) Develop an implied common share value per unit at the valuation date; and
(vi) Calculate the value of the preferred shares in question.