409A Valuation Methods Explained: Market, Income, and Asset Approaches

The main 409A valuation methodologies are the market approach, the income approach and the asset approach, which value the company as a whole, followed by an equity allocation method that converts that value into a price per share of common stock. Appraisers usually apply two approaches, weight them, and then allocate.

The regulation does not prescribe a method. Treas. Reg. §1.409A-1(b)(5)(iv)(B)(1) requires "the reasonable application of a reasonable valuation method" and lists factors it must consider: tangible and intangible assets, the present value of expected cash flows, market values of comparable businesses, recent arm's-length transactions in the company's stock, and control premiums or marketability discounts. Each of the three approaches maps onto those factors.

Knowing the methods helps you read your report. A report that states a conclusion without explaining methods, weights, assumptions and the allocation is hard to defend in an audit or an acquirer's diligence.

The market approach values the company by reference to prices paid for comparable businesses or for the company's own stock. It has three common forms.

The guideline public company method takes valuation multiples, such as enterprise value to revenue, from public companies with similar business models and growth, then adjusts them for the subject company's size and risk.

The guideline transaction method uses multiples from acquisitions of comparable private companies.

The backsolve method, often called the OPM backsolve, starts from the price investors just paid for preferred stock in the company's latest round and solves for the total equity value that makes that price consistent with the preferred terms. For a venture-backed startup with a recent priced round, this is usually the most heavily weighted method, because it rests on a real arm's-length transaction in the company's own stock.

The weakness of public comparables is that they are larger, liquid and less risky. Appraisers address that with adjustments to the multiples and a discount for lack of marketability (DLOM) on the common stock.

The income approach values the company at the present value of its expected future cash flows. The usual implementation is a discounted cash flow (DCF) model: the appraiser takes management's projection, typically five years or more, and discounts it at a rate that reflects the company's risk. For startups that rate is high, often in the range venture investors target, because early-stage cash flows are uncertain.

It fits companies with an operating history and recurring revenue, such as SaaS businesses with a few years of subscription data. It is weak for pre-revenue companies, where the projection is largely a guess.

The result is sensitive to growth, margin and discount-rate assumptions, so small changes swing the value. Expect the appraiser to ask how the 409A projection compares with the model you showed investors. If they differ, have a reason.

The asset approach values the company at the fair value of its assets minus its liabilities. It suits holding companies, asset-heavy businesses and very early companies whose value sits mostly in cash and identifiable assets.

For most technology startups it sets a floor. For example, a pre-revenue company with $500,000 of cash, $200,000 of equipment and $300,000 of liabilities has a net asset value of $400,000. If it just raised at a $5M post-money valuation, the asset approach clearly misses the value of the technology and team.

It does have uses: a pre-financing company with founder capital only, a company winding down, or a cross-check on other methods. If a report relies only on the asset approach for a company with meaningful revenue or a recent priced round, ask why.

Once the appraiser has an equity value, an allocation method splits it among preferred and common stock, because preferred carries liquidation preferences and other rights that common does not.

• Option pricing method (OPM). Treats each class as a call option on the company's equity value with breakpoints at each liquidation preference, using a Black-Scholes style model. The key inputs are expected time to exit and volatility. It is the default for most venture-backed companies without a near-term exit.
• Probability-weighted expected return method (PWERM). Models specific exit scenarios (IPO, sale, staying private, failure), assigns probabilities, and computes the value of each class in each scenario. It fits later-stage companies with visible exit paths.
• Current value method (CVM). Allocates value as if the company were sold today. It is generally reserved for companies where a liquidity event is imminent or that are so early that no material progress has been made.

Hybrid methods that combine PWERM scenarios with an OPM inside one scenario are common for companies approaching an exit. After allocation, the appraiser applies a DLOM to the common stock to reach the final per-share fair market value.

A worked example shows how the approaches, the allocation and the discount combine into one number. The figures below are hypothetical and simplified.

A Series A SaaS company closed its round four months ago. The appraiser runs two approaches:

• OPM backsolve from the Series A price: total equity value of $40M
• Guideline public company method using revenue multiples, adjusted for size and growth: $32M

Because the round is recent and arm's-length, the appraiser weights the backsolve at 75% and the public company method at 25%. The concluded equity value is (0.75 × $40M) + (0.25 × $32M) = $30M + $8M = $38M.

The OPM then allocates the $38M across Series A preferred, Seed preferred and common. Assume the allocation gives common a marketable value of $0.95 per share. The appraiser applies a 25% DLOM, supported by a put-option or restricted-stock analysis, so the fair market value of common is $0.95 × 0.75 = about $0.71 per share.

Each step is a judgment you can question. Why 75/25 and not 90/10? Why those public companies? Why a 25% discount and not 20%? A good report answers each of these in writing. If yours only shows the final $0.71, ask for the supporting schedules.

Review the methods section by checking that each choice is explained and that every input ties to your own records. You do not need to rebuild the model to catch most problems.

1. Confirm the valuation date and that it is after any recent round, term sheet or secondary sale the report should reflect.
2. Check the share counts, liquidation preferences, conversion ratios and participation terms against the charter and cap table.
3. Read why each approach was used or rejected, and whether the weights match your stage.
4. Compare the projection used in any DCF with the model your board saw. Large differences need a reason.
5. Look at the guideline companies. Are they in your business, and is the multiple adjusted for size and growth?
6. Check the allocation inputs: expected time to exit, volatility and the source of the volatility benchmark.
7. Find the DLOM and the method used to support it.

If an answer is missing, ask the appraiser before the board adopts the report. Corrections are cheap before adoption and expensive after grants have been made.

Weights depend on which evidence is most reliable for your company. Typical patterns:

• Seed or Series A with a recent priced round: heavy weight on the backsolve, with an income or guideline public company method as a cross-check, allocated by OPM.
• Pre-financing: asset or cost approach, sometimes informed by SAFE terms, with large documented discounts.
• Growth stage with steady revenue: guideline public company and DCF methods carry more weight, especially as the last round ages.
• Near an exit: PWERM or a hybrid, with the expected deal terms driving scenarios.

We review the reports our clients receive before the board adopts them, checking that the method choice, weights and allocation fit the company's stage and that the inputs match the cap table and charter. This is general information as of October 2026, not tax advice for your specific facts.