409A Valuation Index and Trends By Industry (2024)
You may want to reward your hard working team with stock options. When you do so, you must stay on the right side of the IRS and get a 409A valuation. Such a valuation determines your company’s fair market value (FMV), based on which you can issue employee stock ownership plans (ESOPs) and other stock-based compensations.
You can use our 409A valuation index as a yardstick for your own 409A valuations. We have also discussed how 409A valuations fluctuated in different industries over the last five years. This can help you estimate the impact of a material event on your 409A valuations.
In the last five years, valuations were largely characterized by a boom in the early 2020s followed by a fall and a prolonged recovery. The magnitude of the boom experienced and the time taken to recover have varied across industries and funding stages. Read on to know why!
409A Valuation Index – Summary
Eqvista has compiled 409A valuation data for the last five years across all startup stages, and various industries. We have compiled this index using anonymized internal data on private company 409A valuations, and public company comps.
You can access our database and observe average 409A valuations for every quarter since 2019 for all funding stages and industries. Low, median, and high data are also available for each funding stage. We will also enable users to request specific data like seed-stage 409A valuation high, low, and median data for a particular industry.
As we were compiling this index, we were able to identify the effects of shifts in consumer behavior and investor interest, adoption challenges, and banking system crises on various industries. We were also able to verify the presence of high risk premiums at the pre-seed stage.
Key Insights
- Finance, health technology, consumer services, transportation, and miscellaneous were the industries with the most fluctuating 409A valuations.
- Seed stage 409A valuations showed very little variation accompanied by narrow ranges.
- At the Series A, B, and C stages, there is a general consensus about a startup’s minimum value but the maximum can be challenged.
- The range of 409A valuations gets narrower from pre-seed to seed stage and then keeps widening.
- Industries like other transportation, savings banks, tobacco, data processing services, and agricultural commodities experienced a significant downward trend in the last five years.
Top Industries with Fluctuating 409A Valuations
Over the last five years, 409A valuations have fluctuated the most in the industry categories of finance, health technology, consumer services, transportation, and miscellaneous.
When we plot 409A share prices for finance startups at the seed stage, we can see that share prices rose in 2020 and 2021 and have dropped ever since. This trend matches the recent highly optimistic phase of equity markets of the early 2020s and sobering up ever since.
Health technology startups steadily rose in value with the onset of COVID-19. When the COVID-19 outbreak occurred in Q4 2019, the markets expected it to be an opportunity for the segment to exploit. However, the threat of COVID-19 and the accompanying lockdowns was largely underestimated. Over the last few quarters, valuations in this segment have plateaued.
Since the miscellaneous segment consists of startups from various smaller segments, valuations tend to vary a lot here. The 1-year increase in 409A share prices was the highest for this segment at 37.21%. In fact, this segment had the highest variance after finance. In our data for this segment, the highest share price was over $1 and the lowest was a little over $0.5.
Pre-seed 409A valuations
Over the last five years, pre-seed 409A share prices have stayed below $0.5 while they can be as low as a little over $0.1.
At the pre-seed stage, 409A share prices vary the most when we look at the lowest share prices for each quarter. We can see this as clear as day when we look at the percentage change since the previous quarter.
On the other hand, dips are less pronounced when we look at the highest share price in each quarter.
How are startups valued at the pre-seed stage?
At the pre-seed stage, most companies have yet to dish out a marketable prototype of their product. Hence, the valuations are decided based on the founder-market fit, total addressable market (TAM), quality and cohesiveness of the founding team, and the amount of traction achieved by the product or service.
Seed 409A valuations
Surprisingly, at the seed stage, 409A valuations vary even less than at the pre-seed stage. This leads us to believe that most of the variance at the pre-seed stage might be caused by the risk premiums being charged. By the time a company reaches the seed stage, it will have outgrown the need for a high risk premium. Hence, the lowest seed 409A share prices were closer to the median 409A share prices in each quarter.
As evidenced by the flatlines, the highest, lowest, and median 409A share prices at the seed stage change very little from previous quarters.
How are startups valued at the seed stage?
At the seed stage, a startup is valued based on its product and performance for the first time. At this stage, startups with high valuations will at least have a minimum viable product (MVP). Although sales and revenue figures are not expected, investors will want to know how the market feels about the product. Positive customer traction is valuable at this stage.
Series A 409A valuations
At Series A, a startup’s 409A share price may cross the $1 mark for the first time. In the last five years, as per our data, the highest 409A share price at the series A stage is $0.975 and the lowest was $0.479. From Series A, the range of 409A valuations starts to widen once again.
If we consider the standard deviation, we can see that the highest 409A share price for each quarter varies the most. In contrast, the lowest 409A share price for each quarter varies the least. This suggests that there is a consensus regarding the minimum value of a Series A startup, but, their maximum could be challenged.
How are startups valued at the Series A stage?
In addition to the factors already mentioned, at the Series A stage and beyond, investors want to know if a company has successfully attracted capital in the past and utilized it well. So, Series A startups need to be able to market themselves to investors and lenders. To do so, they must have encouraging sales figures. To get a decent valuation at the Series A stage, a startup must figure out who to market its product to and how to convert leads into sales. They must have a proven strategy for marketing and distributing the product. All of this is viable only if experienced management is at the helm of a capable team. Hence, human resource choices also matter at this stage.
Series B 409A valuations
From the Series B stage, the range in 409A valuations widens further. In the last five years, the minimum and maximum 409A share prices for Series B startups were approximately $0.5 and $2.
At this stage, the highest 409A share prices vary a lot from quarter to quarter. We can observe this in the following graph as well.
How are startups valued at the Series B stage?
At the Series B stage, startups are considered mature. They still have plenty of room for growth but they have definitely left the ideation and trial-and-error phase behind. At this stage, the startup must have already established the product-market fit and successfully commercialized the product. So, steady revenues are expected at this stage. Series B startups must also display potential for scalability. For this purpose, they must have solid plans for exploiting economies of scale, sourcing inputs, and most importantly, distributing their product at a bigger scale. A highly-valued Series B startup would already have a stronghold over a part of the market.
Series C 409A valuations
Over the last five years, Series C 409A share prices have stayed above $2.5. There was not much variance in this period, with the median share price staying close to $2.75.
If we plot the percentage change from the previous quarter, we can see that it is the highs that vary the most. Once again, a consensus around the minimum value of a Series C startup is suggested, but the maximum value is challenged frequently.
How are startups valued at the Series C stage?
By the time a startup goes for a Series C funding round, it may have passed various opportunities for mergers and acquisitions (M&A). For a startup to do so, it must have absolute confidence in its ability to scale operations. So, Series C startups will be well-known brands with a considerable market share. Even though such startups may not be market leaders, they must display concrete potential for disruption. Another factor that influences valuations at this stage is revenue growth.
Industries with the most downward trend
Over the last five years, the industries with the most downward trend were data processing services, other transportation, savings banks, tobacco, and agricultural commodities or milling. The average seed stage 409A share price for these industries fell by more than 10% in this period.
Data processing services come under the broader category of software-as-a-service (SaaS) startups. According to Crunchbase data, the number of SaaS funding rounds and funds raised have both gone down drastically over the last five years in the US. By the end of May 2024, only 282 SaaS funding rounds occurred while in all of 2019, 1,273 SaaS funding rounds occurred. Hence, we can say that 409A valuations have fallen for SaaS startups due to falling investor interest.
Transporting companies, on the other hand, have been hit by a myriad of crises. To start with, after the pandemic, much of the workforce got used to remote working conditions, reducing the demand for commuting services. Then, in the latter half of 2023, we also experienced a trucking recession because of rising fuel costs and falling freight demand.
While savings banks have been going strong since their revival from the lows of 2021, they were adversely affected by the US banking crisis of 2023. In March 2023, the Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank (FRB) collapsed as a result of deposit outflows.
409A valuations for seed-stage tobacco startups have been falling since the start of Q2 2019. Leading up to this, according to Schroders, alternative nicotine delivery products like Juul were on the rise in 2018. By the end of 2018, e-vapor sales as a percentage of total US cigarette and e-cigarette monthly sales rose to 6.9%.
At the same time, cigarette sales were steadily declining. According to the Centers for Disease Control and Prevention, in 2000, more than 400 billion cigarette sticks were sold in the US. This figure dropped to approximately half by 2019.
As for agricultural commodities or miling startups, according to McKinsey and Company, they faced adoption challenges. Such startups were able to secure seed and Series A funding but could not meet the traction requirements to move to the next stage. This led to a loss of investor confidence in such startups, leading to falling 409A valuations.
Consistent top-performers
Across sectors and stages, three sub-industries that have consistently gotten the highest 409A valuations are financial conglomerates, real estate investment trusts (REITs), and investment trusts or mutual funds. This can only be the result of high investor interest in these sub-industries.
In our opinion, Series B share prices are higher than Series C share prices for financial conglomerates and real estate investment trusts because many highly valued Series B startups of these categories did not need Series C funding in the last five years.
Leverage Eqvista’s experience for accurate 409A valuations!
Over the last five years, the general narrative has been rising valuations in the early 2020s which plummeted subsequently, and the gradual recovery ever since. Thus, at various stages, 409A valuations are more or less at the same level as 2019. We have also seen a significant downward trend in tobacco, other transportation, savings banks, and agricultural commodities or miling startups. These industries experienced downward trends due to shifts in consumer behavior, stresses on the banking system, and adoption challenges.
We were able to draw these conclusions only because we could use our experience valuing more than 15,000 companies to create anonymized data. Now, you can use our experience, too, by simply downloading Eqvista’s 409A valuation index data.
If you require accurate and audit-ready 409A valuations, reach out to us!
