A 409A Valuation is actually different from the post-money valuation of a company after a financing. Commonly, a 409A valuation is lower than the post-money valuation. You may already understand the calculations of pre-money and post-money valuations are simplistic in that both assume the preferred stock and common stock have the same value.
However, it may be a bit hard to distinguish between both valuations, as they both evaluate the same value of a company’s stock. To make it easier for you to distinguish between a 409A Valuation and Post-Money Valuation, let’s find out the information about it through our post below!
Differences Between a 409A Valuation and Post-Money Valuation
Using different valuation methods, it’s so clear enough that a 409A Valuation and Post-Money valuation is different. Here are some points to differentiate between a 409A Valuation and Post-Money Valuation:
- Basic theory
A 409A valuation is basically performed when a company will issue shares to their employees or for raising capital. In other words, it is a method to grant fair market value of the common stock.
The Post-Money Valuation or also known VC valuations comes from the actual transactions of when a venture capitalist buys the shares of a private company. It occurs when they are investing in the company and then take equity in return for the investment.
A 409A valuation is actually performed by compliance experts and uses a more complicated methodology. This valuation is the estimate at the low-end of a defensible valuation range and treats the preferred stock and common stock differently. However, the common stock and preferred stock have different rights and values.
On the other hand, the Post-Money Valuation is the market value that is negotiated between the venture capitalists (VCs) and entrepreneurs that offer investment. However, a 409A Valuation and Post-Money Valuation can be performed at the same time, but it actually gives out different values for each.
Common stock does not have the advantages, like the Preferred stock and is less valuable. While preferred stock has liquidation preferences, the right to receive dividends and the power to block sales or financings.
Since preferred stock and other classes of securities have different rights, the model of this difference may use the Black-Scholes option pricing model. This model actually assumes various hypothetical liquidation scenarios and allocates the various classes or securities, based on their priority in liquidation for those different scenarios.
This approach definitely considers the liquidation preferences and additional rights of preferred stock. It also has the effect of lowering the company value and the common stock. It’s important to note certain valuation methodologies used to evaluate a company’s common stock in compliance with 409A purposes that only apply to the issuance of stock options. It must not be used for strategic purposes such as an acquisition or a financing merger.
Eventually, the 409A Valuation and Post-Money Valuation are intended for two different purposes and differ in level of complexity. However, both are the right tools. A 409A Valuation aims to forecast the Fair Market Value of common stock, while the post-money valuation aims to convey the terms and price of preferred stock that will be issued in a financing round.
Furthermore, the post-money value is the product of the purchase-price of the new preferred stock and the post-financing fully-diluted shares. Well, the pre-money value here is a very useful figure in the negotiation process, but it’s less helpful to determine the value of common stock in the 409A Valuation, since it doesn’t reflect the differences in the economic rights of the common stock and preferred stock.
Therefore, a 409A Valuation that predicts the differences in value of preferred and common stock based on the economic rights will generate a lower aggregate equity value. It’s because not all classes of common stock and preferred stock will be evaluated at the purchase price of the new preferred stock.
The Post-Money Valuation is not used as an input or reconciled in the 409A Valuation. In this case, the purchase/ issue price of the new preferred stock will be considered to be an indication of the market value and the 409A valuation is commonly reconciled with the certain data point of the transaction.
The equity value is back-solved, using a technique to quantify the differences in economic rights of each class of common stock and preferred stock, so that the value being allocated to the new preferred stock will be consistent with the purchase price.
- Approach/ Formula
A 409A Valuation will use some common approaches, including:
- Discounted cash flow analysis: This approach talks about the projected cash flow that is used to find the valuation.
- Asset/ Cost-to-recreate approach: The cost of purchasing similar assets like those in the company or the value of the assets of the company is used to get the valuation.
- M&A Comparables Analysis: This approach refers to the transaction acquisitions of the other businesses that are used to get the valuation.
- Public Comparable Analysis: This approach is similar to public companies that are used to get the valuation.
- Backsolve Option Pricing Model: This approach is used to have the valuation done for the company.
Of course, the company or firm performing to get the company’s 409A valuation will choose the most reliable approach to determine the value of the company.
The Post-Money Valuation is used to determine the value of the company before the investment. This valuation uses a few simple formulas to get the Post-Money Valuation. Here they are:
- Post Money Investment Valuation (1st) = Total Shares in the Company x Price Per Share the VC Paid
- Investment = Number of Shares the VC Bought x Price Per Share the VC Paid
- Pre-Money Valuation = Post Money Valuation – Investment
- Post-Money Valuation (2nd) = Pre-Money Valuation + Investment
- Post Money Investment Valuation (3rd & Final) = Total Number of Shares Outstanding after the Round x Price Per Share the VC Paid
With those formulas, the company or the firm will get easier to understand the Post-Money Valuation. In general, the Post-Money valuation will be higher than the 409A Valuation, since the valuation professionals will find the value towards the lower end of the acceptable range, but the Post-Money does not.