[twakefield]

The 409(a) valuation is the value of the common shares. They are generally valued at a discount to the preferred shares (or company valuation) due to the fact that the preferred shares have a pay back preference and the common are considered less liquid. The discount is generally higher (70-80%) during the early stages of a company when a liquidity event is less certain and the discount decreases over time.

[gruez]

In that case the calculation in the OP seems even more wrong?

>The difference between these two values is the “Implied Value per Share”

By subtracting the two values, you're getting the preferred shares premium, not the "implied value" of the options.

The proper name for "implied value" used in the OP is "intrinsic value"[1]. While it's possible for that to be present, it's probably negligible. At the very least, it's non-trivial to determine, and requires a lot of guesswork regarding the actual current value of the company. 409a valuations exist specifically to prevent giving employees compensation via the intrinsic value of an option (eg. apple issuing options with a strike price of $0.01). Most of the value of the option is in the time value, which is even harder to calculate.

[1] https://en.wikipedia.org/wiki/Valuation_of_options

[molsongolden]

OP isn't attempting to calculate any sort of actual market value for the options, the post just presents a method for determining how many options to grant employees by assuming:

* Investors recently paid FMV per share

* The employee's cost per share will be 409a_value

* The company is actually worth or grows into the current valuation

therefore

* Each share in the employee's grant is theoretically worth (FMV - 409a_value) to the employee

* This value can be used to determine how many shares to grant new employees given the % of base salary equity targets.

Another method might be to use different % of base salary targets and divide that equity value by the current 409a_value instead of the intrinsic value, or to offer flat % of ownership grants by role.