409A Valuations After a Series B: What Changes and Why It Costs More

Yes. A closed Series B is new information that materially affects the value of your common stock, so under Treas. Reg. §1.409A-1(b)(5)(iv)(B)(1) the pre-round valuation is no longer reasonable for new grants, even if it is only a few months old. Pause grants until the post-round report is adopted by the board.

The post-round valuation differs from earlier ones mainly because of the capital structure. After a Series B, a typical company has Seed, Series A and Series B preferred, each with its own liquidation preference, conversion terms and protective provisions. Common stock, which underlies employee options, sits at the bottom of that stack.

The Series B price also gives the appraiser, and any examiner, a clear reference point. If the report puts common at a small fraction of the Series B price per share, the gap has to be explained by the preferred terms, time to exit and marketability, and the report must show that work.

Liquidation preferences are the main reason common stock is worth less than preferred. With a 1x non-participating preference, each preferred holder in a sale chooses between taking its investment back and converting to common to share pro rata. Participating preferred takes its preference and then shares in what remains, which pushes common value down further.

For example, take a company with $50M of total preferences and a $150M sale. If preferred takes its preferences, common and any non-converting holders share the remaining $100M. If the preferred would get more by converting, everyone shares the full $150M pro rata. The math changes at each breakpoint, and that is what the allocation model captures.

The option pricing method models those breakpoints by treating each class as a call option on equity value. The common value it produces depends on the preference stack, expected time to exit and volatility. A discount for lack of marketability is then applied, and it generally shrinks as a company gets closer to a liquidity event. There is no standard ratio of common to preferred price; it depends entirely on your terms.

Provider choice matters more at this stage. Standardized models that work for a seed company can struggle with participating preferred, pay-to-play provisions, multiple anti-dilution formulas, or secondary sales at prices different from the round.

What to ask for:

1. A redacted sample report showing an OPM or PWERM allocation for a similar multi-class structure.
2. The lead appraiser's credentials. ASA, ABV or CFA designations are the easiest to defend.
3. A narrative report that explains method selection, comparable companies, projections and the allocation in enough detail for an auditor or acquirer to follow.
4. How they treat secondary transactions, since recent common sales near the preferred price will need to be addressed.

Post-Series B valuations typically cost more than early-stage ones, often in the mid four figures to low five figures in the current market, because the analysis takes more work. Get quotes; the range is wide.

For employees, the post-round 409A usually rises but stays well below the preferred price. For example, options granted before the round at a $1.00 strike might see the new 409A set common at $3.50 while Series B preferred was priced at $12.00. The gap reflects the preference stack and marketability discount.

Employees exercising incentive stock options need to consider the alternative minimum tax. Under IRC §56(b)(3), the spread at exercise is an AMT adjustment. For example, exercising 10,000 ISOs with a $1.00 strike at a $3.50 FMV creates a $25,000 adjustment, reported on Form 6251. Whether that produces actual AMT depends on the employee's other income.

New hires granted at the higher post-round FMV face a higher strike and a larger exercise cost. Some companies grant more shares to keep offers competitive.

If employees hold stock acquired after July 4, 2025, QSBS under IRC §1202 is worth checking too: the exclusion is 50% after three years, 75% after four and 100% after five, subject to the per-issuer cap and the $75M gross-asset test at issuance.

The liquidation waterfall decides how much of any exit value reaches common stock, and a hypothetical cap table shows why the answer changes so much at different exit values. Assume 10,000,000 common shares and options, Seed preferred of 3,000,000 shares bought at $1.00 ($3M), Series A preferred of 4,000,000 shares at $3.00 ($12M) and Series B preferred of about 2,917,000 shares at $12.00 ($35M). All preferred is 1x non-participating, and for simplicity Series B is senior to Series A, which is senior to Seed. Many charters rank series pari passu instead, which changes the numbers.

• $40M sale. Total preferences are $50M, so there is not enough to go around. Series B takes its $35M, Series A gets the remaining $5M, and Seed and common receive nothing.
• $150M sale. On an as-converted basis there are about 19.9M shares, or roughly $7.53 per share. That is below the $12.00 Series B price, so Series B takes its $35M preference instead of converting. The other $115M is shared by the remaining 17M shares, about $6.76 each, so Series A and Seed convert and common gets $6.76 per share.
• Above about $239M. Only when the as-converted value per share passes $12.00 (19.9M shares × $12.00) does Series B convert, and from then on every share is paid the same.

The OPM runs this waterfall across a full distribution of possible exit values, weighted by volatility and time to exit. Because a meaningful part of that distribution sits in the zone where common gets little or nothing, common ends up well below the $12.00 preferred price before any marketability discount.

Secondary sales of common stock after a Series B have to be addressed in the next 409A, because the regulation lists recent arm's-length transactions in the company's stock as a factor the valuation must consider. They do not automatically set the common value, but the report has to explain how much weight they received and why.

Appraisers usually ask four things about each transaction: who bought, how many shares changed hands, whether the buyer had access to the same information as the board, and whether the price included anything other than the stock, such as information rights or a relationship with an investor. A large, informed purchase near the preferred price carries more weight than a small sale to a friend of a founder.

Company-run tender offers deserve extra care. If employees sell common to the company or to an investor at a price above the common FMV, the excess can be treated as compensation rather than capital gain, with payroll withholding consequences. Talk to the appraiser and counsel before you set a tender price, not after, and expect the next 409A to move toward the tender price if the tender was large and broadly available.

If a secondary happens between valuations, treat it like any other potential material event and ask whether the current report still supports new grants.

Have these ready before you engage the appraiser:

• A cap table that reconciles to signed documents, with all share classes, conversion ratios and outstanding options
• The executed Series B stock purchase agreement and the amended certificate of incorporation
• A financial model with at least three years of projections
• Trailing 12-month financial statements, reviewed or audited if available
• A summary of secondary sales, pending term sheets or acquisition interest

The appraiser will also ask about competitive position, key risks and exit expectations, which drive the time-to-exit and volatility inputs.

We often review the financial model before it goes to the appraiser. The projection feeds the income approach, and a model that differs sharply from what the board and investors saw raises questions in later diligence. This is general information as of October 2026, not tax advice for your specific facts.