Common Stock FMV in 409A Valuations: Why It's Lower Than Preferred Price

The fair market value of common stock in a 409A valuation is always lower than the preferred stock price paid by investors, because common stock lacks the liquidation preferences, anti-dilution protections, and other rights that make preferred stock more valuable. The gap typically ranges from 20% to 45% depending on stage.

Published April 20, 2026

3 min read

Key Takeaways

Common stock FMV is always lower than preferred stock price — this is expected and correct

The common stock discount reflects liquidation preferences, anti-dilution, and other preferred rights

At Pre-Seed, common stock is typically 10–20% of the preferred price

At Series A, common stock is typically 60–75% of the preferred price

As a company approaches IPO, preferred and common converge toward the same price

The OPM (Option Pricing Model) is the standard tool for calculating the common/preferred discount

Why Common Stock Is Worth Less Than Preferred

One of the most common points of confusion for founders and employees is why the 409A valuation establishes a common stock FMV that is significantly below the price investors paid for preferred stock. Understanding this is fundamental to understanding how 409A valuations work.

The Rights That Make Preferred More Valuable

Preferred stockholders (investors) receive contractual rights and protections that common stockholders (founders, employees) do not have. These rights have real economic value:

Liquidation Preference: In an exit (acquisition, IPO, or wind-down), preferred shareholders are paid first — before any proceeds flow to common. In a modest exit, common stock may receive little or nothing while preferred investors recover their full investment (or more).
Participating Preferred: Some preferred investors also participate in the remaining proceeds after receiving their liquidation preference — "double dipping" on exit proceeds.
Anti-Dilution Protection: Weighted-average or full-ratchet anti-dilution provisions protect investors from dilution in down rounds, adjusting their share conversion ratios in their favor.
Dividends: Cumulative or non-cumulative preferred dividends accrue in favor of investors.
Conversion Rights: Preferred can convert to common at will, giving investors flexibility to participate in upside scenarios.

The Common-to-Preferred Discount by Stage

The discount of common stock FMV relative to preferred price typically narrows as the company grows and approaches a liquidity event:

Pre-Seed: 80–90% discount (common = 10–20% of preferred price)
Seed: 65–75% discount (common = 25–35%)
Series A: 55–65% discount (common = 35–45%)
Series B: 40–55% discount (common = 45–60%)
Series C: 30–45% discount (common = 55–70%)
Pre-IPO: 10–25% discount (common converges toward preferred)

How the OPM Calculates the Discount

The Option Pricing Model (OPM) is the IRS-recognized method for allocating total enterprise value between preferred and common. It treats each class of stock as a call option on the total enterprise value:

Set the total enterprise value as the underlying "asset price"
Identify the "exercise prices" (breakpoints) at which each class of preferred participates
Use Black-Scholes to calculate the value of each call option at each breakpoint
Allocate the incremental value between breakpoints proportionally to the shares participating at that level
Apply DLOM to the common stock allocation

The result is a common stock FMV that reflects the economic reality of what common stockholders would receive in a range of exit scenarios, probability-weighted.