Startup Valuation Types Explained: 409A, SAFE, Investor & FMV

This raises common (and valid) questions:

Why are these valuations different?
Which one is "real"?
Which valuation actually matters —” and when?

The short answer is this:

Startups don't have one valuation. They have different valuations for different purposes.

Diagram showing different types of startup valuations including 409A valuation, investor valuation, post-money valuation, exit valuation, and SAFE, and when each is used — Startups don't have one valuation —” they have different valuations for different purposes, including fundraising, tax compliance, equity compensation, and exits.

In this article, we break down the main types of startup valuations, explain when each is typically used, and clarify why differences between them are both normal and expected —” especially when it comes to 409A valuations.

Quick Comparison: Startup Valuation Types

Concept	Is It a Valuation?	When Used	Primary Purpose
409A Valuation	Yes	Before issuing equity	IRS tax compliance
Investor (Preferred) Valuation	Yes	Priced funding rounds	Pricing preferred shares
Post-Money Valuation	Yes	After a financing round	Ownership & dilution clarity
Common Stock Valuation	Yes	Equity compensation	Employee equity pricing
Exit Valuation	Yes	M&A or IPO	Company sale price
SAFE	No	Early fundraising	Defers valuation

1. 409A Valuation (Fair Market Value for Common Stock)

A 409A valuation determines the fair market value (FMV) of common stock for U.S. tax purposes.

When it's used

Before issuing stock options or RSUs
After major events (fundraising, revenue changes, M&A activity)
At least once every 12 months (or sooner if triggered)

Why it exists

The IRS requires companies to price employee equity at fair market value to avoid hidden compensation and tax penalties.

Key characteristics

Regulated and compliance-driven
Focuses on common stock, not preferred
Usually lower than investor valuations
Provides safe-harbor protection when done properly

If you want a deeper explanation, see our full guide: 409A Valuation Overview, 409A Valuation vs Preferred Share Price, and When to Update Your 409A Valuation.

2. Investor (Preferred Share) Valuation

This is the valuation most founders think of first —” the one announced after a funding round.

When it's used

During priced equity rounds (Seed, Series A, Series B, etc.)

What it represents

The negotiated price investors are willing to pay for preferred shares
Often expressed as a pre-money or post-money valuation

Why it's different from a 409A

Preferred shares usually include:

Liquidation preferences
Downside protection
Control rights
Anti-dilution provisions

These features increase value —” but they do not apply to common stock, which is why investor valuations are not appropriate for employee equity pricing. This difference is explored in detail here: Why 409A Valuations Are Lower Than Investor Valuations.

Capital stack diagram illustrating preferred stock above common stock and explaining why common stock is valued lower in a 409A valuation — Investor valuations price preferred shares, which are paid first and include downside protection. A 409A valuation prices common stock, which receives value only after preferences are satisfied.

3. Post-Money Valuation

A post-money valuation is simply:

Pre-money valuation + new capital raised = Post-money valuation

When it's used

Immediately after a funding round closes

Why it matters

Determines ownership percentages
Impacts dilution calculations
Used for cap table modeling

Importantly, post-money valuation is not used for tax compliance and has no role in determining option strike prices.

4. Common Stock Valuation

While closely related to a 409A, it's worth calling out separately.

When it's used

Issuing stock options to employees and advisors
Designing equity compensation plans

Why it's distinct

Common stock:

Sits at the bottom of the capital stack
Has no liquidation preference
Bears the most risk

A properly conducted 409A valuation determines this value using accepted valuation methodologies and IRS guidance.

5. Exit Valuation (M&A or IPO)

This is the valuation everyone hopes to reach —” but it's fundamentally different from all others.

When it's used

Company sale
Merger
IPO pricing

What it represents

The price a buyer or public market is willing to pay
Driven by market conditions, strategic value, and growth expectations

Exit valuations are outcomes, not compliance tools, and are irrelevant for option pricing or tax purposes.

6. SAFE: Why It's Not a Valuation (and Why That Matters)

A SAFE (Simple Agreement for Future Equity) is not a valuation —” by design.

Diagram showing that a SAFE defers valuation to a future priced round and does not establish fair market value for 409A purposes — A SAFE raises capital without setting a valuation. Valuation caps and discounts are not fair market value, and a 409A valuation is still required when issuing employee equity.

What a SAFE does

Allows startups to raise capital without setting a valuation today
Defers valuation until a future priced round

Common misconceptions

A SAFE valuation cap is not your company's current valuation
A SAFE does not replace a 409A valuation
Discounts and caps do not establish fair market value

Why this matters

Many founders assume that raising on a SAFE eliminates the need for a 409A.

It does not.

If you issue equity compensation, the IRS still requires a fair market value determination —” regardless of how you raised capital.

Why These Valuations Don't Match (and Why That's Normal)

Different valuations exist because they answer different questions:

Investors ask: What return can I make?
The IRS asks: What is the fair market value today?
Employees ask: What price am I paying for equity?

Trying to force one valuation to serve all purposes leads to confusion —” and often compliance risk.

Which Valuation Matters Most —” and When?

Timeline diagram showing SAFE fundraising, investor valuations, recurring 409A valuations, and exit valuation across startup growth stages — Different valuations apply at different stages of a startup's lifecycle. While investor valuations change by round, a 409A valuation must be refreshed at least every 12 months or after material events.

Issuing employee equity? You need a 409A valuation
Raising capital? Investor valuation applies
Using SAFEs? Valuation is deferred, not eliminated
Selling the company? Exit valuation governs

Understanding the distinction helps founders:

Avoid IRS penalties
Set fair option prices
Communicate clearly with employees and investors

Final Thoughts

Valuation confusion is one of the most common (and stressful) issues founders face —” especially as companies grow and mature.

The key takeaway is simple:

Different valuations serve different purposes —” and none of them are "wrong" in context.

If you're issuing equity or planning to do so, make sure the valuation you rely on is the one the IRS actually cares about.

Learn more in our 409A Valuation Guide or explore additional articles in our Insights Library.

The Different Types of Startup Valuations —” and When Each One Matters