Quick answer: A funding round resets the market evidence for what your company is worth, but the price investors pay for preferred shares is not the fair market value of common stock. Valuers use the OPM Backsolve method to work backward from the preferred price to enterprise value, allocate that value across the capital structure based on each security’s rights, and then apply a Discount for Lack of Marketability (DLOM) — arriving at a common stock FMV that is typically well below the preferred price. Because a priced funding round is a material event, most companies need a fresh 409A valuation before granting further stock options.
1. Why a Funding Round Changes Common Stock FMV
A 409A valuation is an independent determination of the fair market value (FMV) of a private company’s common stock, prepared to satisfy Section 409A of the US Internal Revenue Code. It sets the floor exercise price at which employee stock options can be granted without triggering adverse tax treatment. We cover who needs one and why an Indian valuer can prepare one in Can an Indian Valuer Do a 409A Valuation? — this guide picks up from the point where a company has just closed a priced round and needs to know what its common stock is now worth.
A priced round is one of the most influential events in a startup’s valuation history, because it puts a real, negotiated number on the table: the price sophisticated investors were willing to pay for preferred shares after detailed due diligence. That price is genuine market evidence, and valuers rely on it heavily. What it is not, however, is the fair market value of common stock.
Preferred shares carry a package of rights that common shares do not — most commonly:
- Liquidation preference, which lets preferred investors recover their investment before common shareholders receive anything in an exit.
- Anti-dilution protection, which shields investors against a future down round.
- Conversion rights, dividend preferences where applicable, and protective or governance provisions.
These rights reduce risk and increase value for the class that holds them. Common shareholders — generally founders and employees — hold none of these protections and are entitled only to whatever value remains once preferred claims are satisfied. That asymmetry, not any flaw in the company, is why common stock FMV is almost always meaningfully below the round’s preferred price, and why the round price cannot simply be carried over as the new option exercise price.
Because a priced round changes the assumptions the prior 409A valuation was built on, it is generally treated as a material event under IRS guidance — meaning companies should obtain a fresh valuation before granting further stock options, a point covered in Section 6.
2. From Preferred Price to Enterprise Value: The Backsolve Starting Point
Determining common stock FMV after a round happens in two stages: first estimating the company’s total enterprise value, then allocating that value across the capital structure. Before a priced round exists, valuers typically lean on the Income Approach (discounted cash flow) or Market Approach (comparable companies and transactions) to estimate enterprise value. These approaches, along with the Current Value Method used for very early-stage companies with no institutional round yet, are compared in 409A Valuation Methods: OPM vs PWERM vs Backsolve.
Once a priced round has closed, however, the Backsolve Method generally takes over as the primary anchor. Rather than projecting forward from cash flows or comparable companies, Backsolve works in reverse: it starts from the known price investors paid for preferred shares and solves for the enterprise value that would justify that price, given the company’s full capital structure and the rights attached to each class of security. Because it is grounded in a genuine arm’s-length transaction rather than a forecast, Backsolve is widely regarded as the most defensible starting point in the months immediately following a round.
3. How OPM Backsolve Allocates Value Across the Cap Table
Once an enterprise value has been backed out of the round price, the Option Pricing Method (OPM) allocates that value across every class of security — preferred shares, common shares, outstanding options, SAFEs, and convertible notes — by modelling each class as a call option on the company’s total equity value, typically using the Black-Scholes framework. Because preferred shareholders sit ahead of common in the payout order, a larger share of enterprise value is absorbed by preferred claims before anything is left over for common stock.
In broad terms, the process runs as follows:
- Take the price paid for preferred shares in the most recent arm’s-length round.
- Map the full capital structure — every class of preferred and common stock, the option pool, and any SAFEs or convertible notes, along with their respective rights.
- Calibrate enterprise value so that the OPM output for the preferred class matches the actual round price.
- Apply that same calibrated enterprise value across the rest of the capital structure to determine the pre-discount value attributable to common stock.
Seeing the Waterfall in Action
The four steps above become clearer with a concrete illustration. Suppose a startup has 4,000,000 common shares outstanding (founders, employees, and the option pool) and closes a Series A round in which investors buy 1,000,000 preferred shares at USD 10.00 each — a USD 10 million round, with a standard 1x non-participating liquidation preference.
OPM effectively asks: across every possible future exit value, what does each share class actually receive? The table below shows the payout at a few illustrative exit values.
| Company Sells For | Preferred Receives | Common Receives (Total) | Common Per Share |
|---|---|---|---|
| USD 8 million | USD 8.0 million (all available) | USD 0 | USD 0.00 |
| USD 20 million | USD 10.0 million (1x preference) | USD 10.0 million | USD 2.50 |
| USD 50 million | USD 10.0 million (preference = conversion value) | USD 40.0 million | USD 10.00 |
| USD 100 million | USD 20.0 million (converts to common) | USD 80.0 million | USD 20.00 |
Below roughly USD 10 million, preferred investors absorb the entire exit value through their liquidation preference and common receives nothing. Between USD 10 million and USD 50 million, preferred still takes its fixed preference first, and common only shares in what is left over. Only once the exit value is large enough that converting to common becomes more valuable than the preference — USD 50 million in this illustration — do preferred and common start sharing proceeds on the same footing.
This simple payout mechanic is what OPM is modelling, in probability-weighted form, across every possible future exit value — not just the four shown here — which is why the pre-DLOM common value shown in Section 5 lands well below the preferred price even before marketability is taken into account.
The result is a common stock value that reflects real transaction evidence, filtered through the actual economic rights each class of security holds, rather than an assumption that every share in the company is worth the same amount. A fuller comparison of when OPM, Backsolve, and PWERM each apply — including how the method itself evolves as a company approaches an exit — is in 409A Valuation Methods: OPM vs PWERM vs Backsolve.
Just closed a funding round and need a compliant post-round 409A valuation?
We prepare IRS-compliant OPM Backsolve valuations for Indian startups with Delaware C-Corp parents, coordinated with any Rule 57 or FEMA valuation the same round triggers on the Indian side.
4. Applying the Discount for Lack of Marketability (DLOM)
Even after enterprise value has been allocated across the cap table, one adjustment remains: the Discount for Lack of Marketability (DLOM). Private company shares cannot be sold on an exchange the way public shares can — a sale generally requires board or shareholder consent, a willing buyer, and often years of waiting for a liquidity event. DLOM reduces the pre-discount common stock value to reflect that illiquidity.
The appropriate DLOM is not fixed; it depends on how long a holder is likely to wait for a liquidity event and how much uncertainty surrounds the business. As a general, not prescriptive, guide:
| Company Stage | Typical DLOM Range | Why |
|---|---|---|
| Pre-revenue / Seed | 30% – 40% | Long expected holding period, high uncertainty, few liquidity options |
| Post-Series A, growing | 20% – 30% | Improved stability, shorter expected time to a liquidity event |
| Series B / growth stage | 15% – 25% | Stronger financials, more visibility into a future exit |
| Pre-IPO / near-term exit | 10% – 15% | High probability of liquidity within a short period |
Rather than applying a single figure by feel, valuers typically cross-check this range against quantitative put-option models — most commonly David Chaffe’s at-the-money put option approach and John Finnerty’s average-strike put option model — both of which estimate DLOM as the cost of a hypothetical option to guarantee liquidity on an otherwise restricted share. The two do not always agree: the Chaffe approach tends to imply a somewhat higher discount, while Finnerty’s average-strike construction tends to land more moderately. Appraisers generally weigh these models alongside empirical restricted-stock and pre-IPO placement studies, rather than relying on any single model in isolation, and document the reasoning behind the figure ultimately used — an unsupported DLOM is one of the more common points challenged during an audit or IRS review.
5. Putting It Together: An Illustrative Example
The following simplified illustration shows how the two steps combine. Suppose a startup closes a Series A round in which investors pay USD 10.00 per preferred share.
| Security | Illustrative Value |
|---|---|
| Series A preferred share price | USD 10.00 per share |
| Common stock value before DLOM (post-OPM allocation) | USD 5.25 per share |
| Common stock FMV after DLOM | USD 3.75 – 4.25 per share |
While the exact gap depends heavily on the company’s stage and capital structure, common stock FMV after DLOM typically lands within the following range of the latest preferred price — illustrative, not prescriptive, since the actual figure depends on the individual company’s facts:
| Company Stage | Typical Range (After DLOM) |
|---|---|
| Pre-revenue / Seed | 15% – 30% |
| Post-Series A, growing | 30% – 45% |
| Series B / growth stage | 40% – 60% |
| Pre-IPO / near-term exit | 55% – 75% |
In the illustration above, USD 3.75–4.25 works out to roughly 58% to 63% below the USD 10.00 preferred price — consistent with the “Post-Series A, growing” band above, since this is a fairly typical outcome shortly after a Series A round. As the table shows, that gap narrows as a company matures toward a liquidity event, consistent with the DLOM ranges in Section 4.
A lower common stock FMV is not a signal that the company itself is worth less than the round implied. It reflects the different economic rights attached to each class of security, not a change in what the business as a whole is worth. The discount is a defensible, methodology-driven output, not an arbitrary attempt to undervalue employee equity.
6. When a Funding Round Requires a Fresh 409A Valuation
A 409A valuation is generally valid for up to 12 months under the safe-harbor presumption in Treasury Regulation Section 1.409A-1(b)(5)(iv)(B), provided no material event occurs in the interim. A priced funding round is squarely a material event: it produces fresh, arm’s-length evidence of value that the prior valuation’s assumptions did not reflect. As a practical rule, companies should treat the close of any priced round as the trigger to commission a new 409A valuation before the next option grant, rather than continuing to rely on the pre-round number. Typical cost and turnaround time for that fresh valuation are covered in 409A Valuation Cost in India.
SAFEs and convertible notes are a partial exception. Because these instruments typically do not fix a definitive share price at the time they are issued, raising capital exclusively through SAFEs or convertible notes does not, by itself, automatically require a new 409A valuation the way a priced equity round does. That said, the valuation professional should still be told about every outstanding SAFE and convertible instrument, since a substantial volume of them can affect the capital structure the eventual allocation is run against. Once those instruments convert during a later priced round, that round becomes the clear trigger for a fresh valuation. For startups raising through an iSAFE or Convertible Note with no US nexus at all, a separate set of Indian frameworks applies instead — covered in SAFE and Convertible Note Valuation in India.
Does This Affect Options Employees Already Hold?
No. A new 409A valuation resets the exercise price only for stock options granted after the new valuation takes effect. Options already granted keep the exercise price set on their original grant date — a funding round does not retroactively reprice existing grants. What it does affect is every option granted from that point forward, which is exactly why timing the fresh valuation to follow the round, rather than trailing it by months, matters for both the company and its option holders.
A funding round is far from the only material event — significant secondary transactions, M&A discussions, major shifts in financial performance, and IPO preparation can each invalidate reliance on an existing valuation too. The complete list of triggers and the 12-month refresh cadence is covered in Who Can Perform a 409A Valuation?, and the tax consequences of granting options against a stale valuation — including the 20% additional federal tax under IRC Section 409A(a)(1)(B) — are covered in Can an Indian Valuer Do a 409A Valuation? For a broader look at how fundraising and 409A compliance fit together, see How Fundraising and 409A Valuation Go Hand-in-Hand.
7. A Post-Funding ESOP Checklist for Founders
Before granting the next round of stock options after a raise, it is worth working through a short checklist:
- Confirm the valuation is current. A 409A valuation from before the round no longer reflects the company’s assumptions, even if it is still within its 12-month window.
- Line up Indian compliance alongside the US filing. For a Delaware Flip structure, the same round often triggers a Rule 57 working and FEMA pricing requirements on the Indian side — coordinate these rather than commissioning them separately.
- Engage an independent, qualified appraiser. Internal finance teams and founders cannot satisfy the IRS independence test, regardless of their skill.
- Keep the capitalisation table current. Every new class of preferred stock, updated option pool, and outstanding SAFE or convertible note changes the allocation.
- Document the valuation file. Financial statements, the capitalisation table, investor agreements, and board resolutions should all be retained alongside the report.
- Brief employees on what changed. The exercise price on new grants will usually differ from any figure referenced around the round, and a short explanation avoids confusion later.
Download: Post-Funding 409A & ESOP Checklist
A one-page checklist covering valuation timing, Indian compliance coordination, documentation, and employee communication after a priced round — email us and we will send it across.
8. 409A Alongside Rule 57 and FEMA for Indian Startups
Indian startups running a Delaware Flip structure are typically managing more than one valuation regime at the same time a funding round closes: Section 409A for the US parent’s common stock, Rule 57 of the Income-tax Rules, 2026 (issued under the Income-tax Act, 2025, effective 1 April 2026, and the successor to the erstwhile Rule 11UA of the Income-tax Rules, 1962) for the fair market value of the Indian subsidiary’s shares, and FEMA pricing guidelines for the cross-border share issuance itself.
These three exist for different regulatory purposes and are not interchangeable, but because they typically relate to the same underlying round, running them in isolation invites inconsistencies that surface later during an audit or investor due diligence. Coordinating the US and Indian workings from the outset — so the assumptions about the round, the capital structure, and the resulting values are consistent across reports — tends to save considerably more time than reconciling them after the fact.
9. Why Work with Marcken Consulting LLP
Determining common stock FMV after a funding round means more than plugging numbers into a template — it means understanding the specific rights negotiated into the latest round, modelling them correctly through OPM Backsolve, and supporting the resulting DLOM with a defensible methodology. Our valuation team has experience preparing 409A valuations for venture-backed Indian startups with Delaware C-Corp parents, alongside Rule 57 and FEMA valuations for the Indian side of the same transaction — coordinated as one engagement rather than disconnected reports.
Our team includes IBBI-Registered Valuers and Chartered Accountants working across OPM, Backsolve, PWERM, and DCF methodologies. Where an engagement also calls for a Merchant Banker’s certificate, that certificate is issued by a SEBI-registered Category-I Merchant Banker within the same coordinated engagement, so cross-border founders are not left assembling separate reports from disconnected advisors.
Frequently Asked Questions
What is a 409A valuation, in one line?
An independent appraisal of a private company’s common stock FMV, prepared under Section 409A of the US Internal Revenue Code to set a compliant exercise price for employee stock options.
Why is common stock FMV lower than the price investors just paid for preferred shares?
Preferred shares carry rights common stock does not — liquidation preference, anti-dilution protection, and conversion rights among them — which make them worth more per share. Common stock is also subject to a Discount for Lack of Marketability that preferred shares, negotiated directly with the company, are not.
What does “OPM Backsolve” actually mean?
It is the Option Pricing Method run in reverse: instead of estimating enterprise value independently, the valuer starts from the known preferred share price and solves for the enterprise value that would produce it, then uses that figure to allocate value across the rest of the capital structure, including common stock.
Does every priced funding round require a new 409A valuation?
In practice, yes. A priced round is treated as a material event because it provides fresh market evidence of value, so most companies obtain an updated 409A valuation before granting further stock options rather than relying on the pre-round report.
Do SAFEs or convertible notes trigger a new valuation the same way a priced round does?
Generally not by themselves, since they typically do not fix a definitive share price. The valuer should still be told about all outstanding SAFEs and notes, and once they convert in a later priced round, that round becomes the clear trigger for a fresh valuation.
What is DLOM, and roughly how large is it?
The Discount for Lack of Marketability reflects the reduced value of shares that cannot be readily sold. It commonly runs from around 30–40% for pre-revenue or seed-stage companies down to 10–15% for companies nearing an IPO, though the figure used in any specific engagement should be supported by the company’s own facts.
Can a US 409A valuation be used to satisfy Rule 57 or FEMA requirements in India?
No. Each serves a distinct regulatory purpose with its own methodology and authorised signatory. A Delaware Flip structure completing a funding round typically needs a 409A valuation for the US parent’s option grants and a separate, coordinated Rule 57/FEMA valuation for the Indian subsidiary.
Conclusion
A funding round is powerful evidence of what a company is worth, but the price investors pay for preferred shares is never the same number as common stock FMV. Getting from one to the other takes a defined process — backsolving enterprise value from the round price, allocating that value across the capital structure through OPM, and applying a supportable Discount for Lack of Marketability — and each step needs to be documented well enough to hold up under IRS or investor scrutiny.
Because a priced round is a material event, it is also a trigger: companies should treat the close of a round as the point to commission a fresh 409A valuation, not an afterthought to handle whenever the annual renewal happens to fall due. For Indian startups running a Delaware Flip structure, that same round usually calls for Rule 57 and FEMA workings on the Indian side too — best coordinated with the 409A valuation rather than commissioned separately.
Just closed a round and need your post-funding 409A valuation?
Marcken Consulting LLP prepares IRS-compliant OPM Backsolve valuations for Indian startups with US structures, alongside Rule 57 and FEMA valuations under one coordinated engagement.
Marcken Consulting LLP | CA Murli Chandak — IBBI-Registered Valuer (Securities or Financial Assets)
Website: marckenconsulting.com
Phone: +91 99980 59923 / +91 99985 39902
Email: crm@marckenconsulting.com
