Fair Market Value (FMV) as a percentage of Preferred
Carta is the largest independent provider of 409A valuations in the country, and we understand our customers want the lowest defensible 409A to maximize stakeholder value. Even still, customers sometimes believe our valuation conclusions are "too high" given the stage, risk profile, and outlook of their businesses, or relative to back-of-the-envelope calculations. But no one in the 409A industry really knows what "too high" is.
Valuation practitioners, lawyers, investors and auditors all have different opinions on what percentage of the most recent Preferred financing round's price the 409A value should be. (The calculation is simple: divide the 409A value by the price of the Preferred stock.) The opinions range between 10% and 40% of the most recent Preferred price, with the percentage increasing as a company nears an exit.
These opinions are conjecture, not truth.
Carta 409A valuation data
We compiled data to investigate this feedback and determine what the average percentage of Preferred a 409A is per round across the 409A industry. The data set includes 2,100+ Carta/SVBA 409A valuations and 700+ 409A valuations completed by over 30 different valuation providers. This data was anonymized and aggregated. All valuations were performed from 2015 to 2018. This is, to our knowledge, the first comprehensive look at common stock value as a percentage of a company's most recent round of Preferred pricing.
Here are the aggregated results:
(Several points about the above data: Carta outsourced all valuation work in 2015, 146 valuations completed under the SVBA brand are included, and we fully expect the A and B percentages in 2018 to normalize once we complete more 409As.)
The percentage of a Carta-determined FMV to the most recent Preferred price across all stages is close to the valuation industry's average:
As shown, Carta's valuation results don't vary materially from the industry. In most cases, this difference wouldn't impact the concluded value due to rounding. That said, these are simple averages and not absolute truths that any specific business should expect. Where a company falls relative to these benchmarks depends on the rights and preferences associated with an individual company's cap structure.
Carta's valuation practice philosophy
The key to a well-executed 409A is to adjust for the risk of an investment based on the stage of the company. Newer startups have more risk, so they have a lower common to Preferred ratio compared to growth or later-stage investments. As companies mature, the risk profile shifts, too. A reputable 409A valuation adapts methodologies and assumptions to adjust for the company's changing risk profile. Providers that don't adapt assumptions put their customers at risk of penalties from the IRS and from a financial reporting perspective.
409A guidelines and best practices are constantly evolving; what won't change is using software to automate mathematical calculations to allow experienced valuation teams to focus on underlying assumptions and settle on an audit-defensible price.
It's reassuring to confirm that the conclusions from our software-enabled processes yield results that are consistent with all other valuation providers.