Fair market value

Fair market value is a tax concept before it is a finance one. The US tax code uses it wherever a transaction has to be priced without a sale: the value of shares received on an exercise, and the lowest strike an ISO can carry.

A public company's FMV is read off the exchange. A private company has no market, so it hires an appraiser, and the appraiser's per-share figure is the 409A valuation. The tax regulations presume an independent appraisal reasonable for up to 12 months, unless later information materially affects the value. The figure is for common stock, the class employees hold; investors' preferred stock carries rights common stock does not, so its price is a different figure.

For an option holder, FMV matters on two dates. On the grant date it sets the strike. On the exercise date it sets the spread, and so the tax.

A company's 409A is $2.00 a share when an employee is granted 1,000 options, so the grant carries a $2.00 strike. Two years later a new 409A comes in at $5.00, and the employee exercises.

The spread on the exercise is $3.00 a share, or $3,000: the FMV on the exercise date minus the strike the earlier FMV set. Had the exercise happened a month before the new valuation, the earlier 409A would have priced it.

FMV on the exercise date

$5.00

FMV on the grant date, the strike

− $2.00

Spread per share

$3.00

Shares exercised

× 1,000

Spread

$3,000

Everything an option is worth on paper is measured against FMV. Vested options times the gap between FMV and strike is the value of a grant; a new 409A re-prices that figure for the whole company at once, up or down.

The FMV on an exercise date is the number a later tax return is built on. It sets the bargain element, and it becomes the cost basis of the shares for an NSO. At a private company it is the 409A in force on the day, and an exercise recorded without it leaves that sum unanswerable later.

The investors' price is not the FMV. Preferred stock carries rights common stock does not, and the gap between the two prices is information about the company, not value the employee holds.

Taiga Finance prices a private company from its 409A history, entered in the company drawer as “409A FMV / sh” with an “As of” month, and each new entry re-values every grant at that company. The history lists the 409A entries and any preferred round, and the chart draws the preferred prices as reference diamonds beside the common line. A public company shows its market price in its header instead.

An exercise carries its own FMV: the log-exercise form's “FMV that day / sh” is prefilled from the 409A on that date, and the exercise history keeps it as “FMV then”. Valuations are typed in or read from a Carta file.