409A Valuation Example: From Enterprise Value to Common Stock FMV — A Complete Guide for Indian Startups

Quick answer: A 409A valuation converts a startup’s Enterprise Value into the Fair Market Value (FMV) of its common stock in 3 stages — determine Enterprise Value, allocate that value across preferred and common share classes (commonly via the Option Pricing Method), then apply a Discount for Lack of Marketability (DLOM). In the worked example below, an Indian SaaS startup with a Delaware Flip structure and a USD 12,000,000 Enterprise Value ends up with a common stock FMV of just USD 0.62 per share — about 31% of what Series A investors paid for preferred stock — purely because of liquidation preference and illiquidity, not because the company lost value.

1. What a 409A Valuation Actually Solves For

A 409A valuation is an independent determination of the fair market value of a private company’s common stock, prepared under Section 409A of the US Internal Revenue Code. It sets the minimum exercise price at which stock options can be granted to employees, founders, advisors and consultants without triggering adverse tax treatment. If options are priced below FMV, the IRS can treat the grant as non-compliant deferred compensation — triggering immediate income inclusion, an additional 20% federal tax under Section 409A(a)(1)(B), and interest on the unpaid tax.

For Indian startups, this becomes relevant the moment a Delaware C-Corporation sits above the Indian operating company and starts granting equity to people who may be based entirely in India. We cover that trigger in full in Can an Indian Valuer Do a 409A Valuation? and the allocation methods themselves — OPM, PWERM, Backsolve and Hybrid — in 409A Valuation Methods. This guide assumes you already know a 409A valuation is required and answers a different question: what does the actual arithmetic look like, from the first dollar of Enterprise Value down to the final FMV per common share?

2. The Three Stages, in One View

A 409A valuation is not the company’s total value divided by its share count. It is a structured, 3-stage process:

1. Enterprise Value (EV) — the value of the business as a whole, before considering the different rights attached to different share classes.
2. Allocation — splitting that EV across preferred shares, common shares, options and convertible instruments, using a method such as OPM, PWERM or Backsolve.
3. DLOM — a downward adjustment to the resulting common share value, to reflect that private-company shares cannot be freely traded.

The rest of this article runs one complete, illustrative example through all 3 stages, start to finish. The figures are hypothetical and intended only to demonstrate the mechanics — not to represent any actual company’s valuation.

3. The Example: An Indian SaaS Startup With a Delaware Flip

Consider a SaaS company built and run out of India, which has put a Delaware C-Corporation in place as its parent (a “Delaware Flip”) so that it can raise from US venture funds and issue options to its team through the US entity. Product, engineering, customer support and finance all sit in the Indian subsidiary; the Delaware parent is the holding company and the ESOP-issuing entity.

The company has just closed a Series A round. The relevant facts:

Particulars	Details
Funding round	Series A
Investor security	Series A Preferred Shares
Liquidation preference	1x, non-participating
Series A Preferred shares issued	6,000,000, at USD 2.00 per share
Common shares (founders, employees, ESOP pool)	3,000,000
Total fully diluted shares	9,000,000
Annual Recurring Revenue	USD 1.5 million, growing year-on-year
Expected time to Series B	18–24 months
Valuation date	Immediately after Series A closing

Because both preferred and common shares exist side by side, and each carries different rights, the common share value cannot be read off this table directly — it has to be built up through the 3-stage process below.

4. Step 1 — Enterprise Value via the Backsolve Method

The starting point of every 409A valuation is Enterprise Value. For a company that has just closed a priced round, the Backsolve Method is usually the strongest evidence available: rather than building an independent forecast, it calibrates Enterprise Value so that it reproduces the price sophisticated investors just paid, given the rights attached to what they bought.

In this example, the Series A round provides that evidence, and the valuation professional arrives at an Enterprise Value of USD 12,000,000. A Discounted Cash Flow analysis is often run alongside Backsolve as a reasonableness check — useful for Indian Delaware-Flip startups in particular, since the cash flows actually being generated sit in the Indian subsidiary — but it does not replace Backsolve as the primary approach so soon after a priced round.

At this stage, USD 12,000,000 is the value of the whole company. It is not the value of common stock, and it is not yet split between preferred and common holders — that is Step 2.

5. Step 2 — Allocating Enterprise Value Between Preferred and Common

It is tempting to divide Enterprise Value by total shares outstanding: USD 12,000,000 ÷ 9,000,000 = USD 1.33 per share. That figure is wrong for 409A purposes, because it treats preferred and common as economically identical — and they are not.

The Series A Preferred shares in this example carry a 1x non-participating liquidation preference: before common shareholders see any proceeds in a sale, merger or liquidation, preferred investors are entitled to recover their original investment of USD 12,000,000 (6,000,000 shares × USD 2.00 per share). If the company were sold today at its current Enterprise Value, preferred would absorb essentially all of it, leaving common with close to nothing on a straight liquidation basis.

That is exactly why a straight liquidation split is not used. Valuers instead apply the Option Pricing Method (OPM), which treats each class of stock as an option on the company’s future value rather than a claim on today’s value alone. Common stock only participates once value exceeds preferred’s liquidation threshold — but because the company has 18–24 months of runway to a plausible Series B, and outcomes above that threshold are far from impossible, OPM assigns common stock a real, positive value today, built entirely from that future optionality.

For this example, assume the OPM — run using Enterprise Value, the capital structure above, an estimated volatility, a risk-free rate and an assumed time to liquidity — produces the following allocation:

Equity Class	Allocated Value
Series A Preferred Shares	USD 9,600,000
Common Shares	USD 2,400,000
Total Enterprise Value	USD 12,000,000

USD 2,400,000 — 20% of Enterprise Value — is now the total value attributable to all common shares combined. This allocation is the single most important number in the whole exercise: get it wrong, and every downstream figure is wrong with it.

6. Step 3 — The Pre-DLOM Common Share Value

Converting the common equity allocation into a per-share figure is simple division:

USD 2,400,000 ÷ 3,000,000 common shares = USD 0.80 per share

This USD 0.80 is a theoretical value: it assumes common stock could be freely bought and sold, which it cannot. Employees who exercise options cannot generally sell the underlying shares until the company reaches an IPO, acquisition or other liquidity event, often years later. That gap between theoretical and realistic value is addressed in the final step.

7. Step 4 — Applying the Discount for Lack of Marketability

The Discount for Lack of Marketability (DLOM) reduces the pre-DLOM value to reflect the illiquidity of privately held shares — no public market, transfer restrictions, and an uncertain timeline to a liquidity event. The appropriate DLOM depends on company-specific facts, but as a general reference point, 409A Valuation Methods sets out the ranges valuers commonly work within by stage — roughly 30–40% for pre-revenue and seed-stage companies, narrowing to 10–15% for companies nearing an IPO.

This company has already closed Series A and is generating USD 1.5 million in ARR, placing it in the “post-Series A, growing” band of that range (20–30%). Assume the valuation professional selects a DLOM of 22%.

Final FMV = Pre-DLOM Value × (1 − DLOM)
Final FMV = USD 0.80 × (1 − 22%) = USD 0.80 × 0.78 = USD 0.624, rounded to USD 0.62 per common share

This USD 0.62 is the figure that would generally be used as the minimum exercise price for new option grants under Section 409A, until a new valuation is triggered by the passage of time or a material event.

8. The Complete Waterfall, End to End

Step	Result
Enterprise Value (Backsolve, from the Series A round)	USD 12,000,000
Value allocated to common equity (OPM)	USD 2,400,000
Pre-DLOM common share value (USD 2,400,000 ÷ 3,000,000 shares)	USD 0.80
DLOM applied	22%
Final 409A FMV	USD 0.62 per common share

9. Why USD 0.62 Is Correct — Not a Discount Applied Arbitrarily

Series A investors in this example paid USD 2.00 per preferred share; the 409A exercise price comes out at USD 0.62 per common share — roughly 31% of the preferred price. Founders often read that gap as an arbitrary haircut. It is not. It is the combined, mechanical result of 2 separate, defensible adjustments already walked through above: the OPM allocation (which routes value to preferred first, through its liquidation preference, before common participates) and the DLOM (which prices in the illiquidity common shareholders actually bear). There is no fixed percentage that applies across all startups — a company with a smaller preference stack, a shorter runway to exit, or a materially different capital structure would land on a different ratio entirely. We cover the underlying reasons for the preferred-versus-common gap in more general terms in 409A Valuation vs. Investor Valuation.

10. What This Means for Indian Startups: Rule 57, Companies Act and FEMA Alongside 409A

A 409A valuation only ever prices the Delaware parent’s common stock. It does not substitute for the Indian-side valuations the same corporate structure can separately require:

Requirement	What It Covers
409A Valuation	FMV of the US parent’s common stock, for pricing US option grants
Rule 57 (Income-tax Rules, 2026)	FMV of the Indian subsidiary’s shares for specified Indian income-tax purposes — the successor to the erstwhile Rule 11UA of the Income-tax Rules, 1962
Companies Act, 2013 (Section 247)	A Registered Valuer’s report for corporate actions such as preferential allotments or restructuring
FEMA (Rule 21, Non-Debt Instruments Rules, 2019)	Pricing guidelines for any share issuance or transfer between resident and non-resident parties

None of these 4 is interchangeable with another, and a valuation prepared for one purpose cannot be substituted for another — each answers to a different regulator with its own methodology. We go into the 409A-versus-Rule-57 distinction specifically in Rule 11UA vs 409A Valuation, and into how to decide which report a given transaction actually needs in Which Valuation Report Do You Need? Where a transaction also requires a Merchant Banker’s certificate, that certificate is issued by a SEBI-registered Category-I Merchant Banker within the same coordinated engagement.

11. Common Mistakes When Working Through an Example Like This

• Dividing Enterprise Value by total shares. As shown in Step 2, this ignores liquidation preference entirely and overstates common stock value.
• Treating the DLOM as optional. Skipping it, or using a token figure, overstates FMV and weakens the valuation’s IRS safe-harbor protection.
• Reusing a stale cap table. A missed option grant, an unrecorded SAFE conversion, or an outdated share count changes the allocation math directly.
• Assuming a 409A number substitutes for Rule 57, Companies Act or FEMA valuations. It does not — see Section 10 above.
• Not refreshing after a material event. A new funding round, acquisition approach, or major change in financial performance can end the 12-month safe harbor early; we cover the full list of triggers in What Is a Material Event for a 409A Valuation?

12. Why Work With Marcken Consulting LLP

Marcken Consulting LLP prepares 409A valuations for Indian startups operating through Delaware Flip structures, applying OPM, Backsolve, PWERM and Hybrid allocation methodologies as appropriate to each company’s funding stage and capital structure. We coordinate the 409A valuation alongside any Indian statutory valuation the same transaction triggers — Rule 57, a Companies Act Registered Valuer’s report, or FEMA pricing certification — within a single engagement, so that the assumptions used across reports stay consistent. Where a Merchant Banker’s certificate is separately required, it is issued by a SEBI-registered Category-I Merchant Banker as part of that same coordinated engagement. From cap table review through to a defensible, IRS safe-harbor-compliant report, we help founders price ESOP grants with confidence.

Frequently Asked Questions

In the example, why is USD 2,400,000 allocated to common stock when the liquidation preference alone equals the entire Enterprise Value?

Because OPM values common stock as an option on the company’s future value, not a claim on today’s value. Even though preferred would absorb essentially all of the USD 12,000,000 in an immediate liquidation, the model recognises a realistic chance that Enterprise Value grows well beyond that threshold before an eventual exit — and that future upside is what gives common stock positive value today.

Why did the example use the Backsolve Method instead of a DCF?

Because a priced, arm’s-length funding round had just closed. Backsolve anchors Enterprise Value to what sophisticated investors actually paid, which is generally considered stronger evidence than an independently built cash-flow forecast in the months immediately following a round. A DCF is often run alongside it as a cross-check rather than a replacement.

Is a 22% DLOM typical for a company at this stage?

It falls within the range valuers commonly apply to companies that have closed a Series A and are showing growth — broadly 20–30% — but the actual figure in any real engagement depends on the specific company’s facts, not a fixed table. See 409A Valuation Methods for the fuller stage-by-stage reference range.

Would the FMV change if this were valued using PWERM instead of OPM?

Potentially, yes. PWERM values a small number of specific, identifiable exit scenarios rather than a continuous range of outcomes, and is generally reserved for later-stage companies with a concrete IPO or acquisition path in view. A company at this stage, with no identifiable near-term exit, is a more natural fit for OPM — which is why OPM was used here.

Does USD 0.62 per share apply to every Series A SaaS startup?

No. Every figure in this example is illustrative and specific to the hypothetical facts assumed — the Enterprise Value, the size of the liquidation preference, and the DLOM selected. A different capital structure, a different runway to the next round, or a different investor security would all change the result. An actual 409A valuation has to be performed on the company’s own facts.

What happens to this FMV once the startup raises its next round?

A new funding round is a material event that ends the existing 409A safe harbor, and a fresh valuation is required before further option grants can rely on the old exercise price. We walk through how the same waterfall recalculates immediately after a new round in 409A Valuation After a Funding Round.

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