Why is the 409A valuation different from my post-money valuation?

It’s important to consider the shortcomings of the definition of post-money valuation. The most common definition of post-money valuation is:

Post-money-valuation = Pre-money valuation + Investment

With a bit of rearranging, you get:

Post-money valuation = Investment / % Ownership

The nuance that sheds light on the issue of the above equation is that the % Ownership is on an as-converted basis. However, two important facts should be considered:

  1. When investors purchase shares, they purchase and own Preferred Shares in your company, which have better economic terms than Common Shares (namely, they are senior in the liquidation preference), and
  2. There is a high likelihood that your startup will produce returns that are less than the liquidation preference, which means that your ownership would be paid less than that of the Preferred Investors [linkto FanDuel Deal].

Given these facts, the value of the Common Stock is arguably lower than the value of the Preferred Stock.

The more accurate description of your company Equity Value would be:

Post-Money valuation = Value of Preferred Shareholders + Value of Common Stockholders + Value of Debtholders.

Although investors, lawyers, and founders negotiate the terms of financing in a pre-money and post-money terms (for various reasons), the 409A valuation is a much more accurate representation of facts and circumstances.

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