- Fair market value: What is FMV and how is it determined?
- What is fair market value?
- What is FMV for stocks?
- Fair market value vs. market value, appraised value, and fair value
- How is fair market value determined?
- What factors can affect the fair market value?
- Why fair market value matters for startups
- FMV sets your option strike price
- The cost of getting FMV wrong
- Why your FMV needs to be defensible
- How founders keep FMV accurate and defensible
- Getting fair market value right
- Frequently asked questions about fair market value
What is fair market value?
Fair market value (FMV) is the estimated price an asset would sell for in the current market under normal conditions. FMV assumes a willing buyer and willing seller are acting in their own best interests, are well-informed, and are under no undue pressure to buy or sell. FMV is commonly used in areas like finance, accounting, taxes, bankruptcy, insurance claims, divorce settlements, charitable donations, estate planning, and real estate to determine an asset's true value.
The IRS definition includes four requirements. Remove any one, and the resulting price is not FMV:
A willing buyer exists: Someone who wants to purchase, not someone coerced into bidding.
A willing seller exists: Someone who wants to sell, not someone forced by debt or deadlines.
Neither party is under compulsion: No fire sales or pressure to close by a certain date.
Both parties have reasonable knowledge: Full information about the asset's condition and value.
When all four conditions are present, the price reflects what the market truly believes the asset is worth.
For private companies, fair market value is used to determine the fair market price of shares of a company's stock and other financial assets when preparing for mergers and acquisitions, providing equity, and to remain in compliance with regulations like Section 409A of the Internal Revenue Code.
What is FMV for stocks?
Fair market value represents what a single share of stock would be worth on the open market. To determine the FMV of most public company stock, you can go online and quickly see the price of shares. This value is influenced by financial and economic factors such as the company's earnings, supply and demand, comparative market analysis, and other market conditions.
For private companies, there's no public market to check. They must determine their common stock's fair market value with a 409A valuation. A 409A valuation is not the same as a "post-money valuation," which is the value for the entire company after raising a round of financing.
This video gives an introduction to valuations and fair market value as part of Carta’s free Cap Table 101 curriculum.
Fair market value vs. market value, appraised value, and fair value
Term | Definition |
Fair market value | The theoretical price between a willing buyer and seller, both informed and unpressured |
Fair value | An accounting concept used for financial reporting under Generally Accepted Accounting Principles (GAAP) |
Market value | The actual price at which an asset sold in a real transaction |
Appraised value | A professional's estimate based on an evaluation method |
Book value | The net asset value from accounting records (assets minus liabilities), which typically differs from FMV |
Two terms in the table are easy to mix up: fair market value and fair value. FMV is the standard of value for income tax purposes. It is the stock's cash price in an open and unrestricted market when both the buyer (for example, an employee) and the seller (for example, the company) have reasonable knowledge of relevant facts. Fair value (FV) is the standard of value for financial reporting purposes. FV is the amount at which stock could be bought or sold between willing parties, that is, other than in a forced or liquidation sale. They are not interchangeable.
You may confuse FMV with the company valuation announced after a funding round. That headline number reflects what investors paid for preferred stock, not what your common shares are worth.
→ Learn more about common vs. preferred stock
How is fair market value determined?
For most assets, appraisers estimate FMV using three recognized approaches: the market approach using comparable sales, the income approach, and the asset (cost) approach based on replacement cost.
To find the fair market value of stock in a private company, that work is done through a 409A valuation. 409A valuations by independent appraisers are the primary IRS-accepted way to determine the current fair market value of a private company's common stock. A 409A valuation may apply methods such as the option-pricing model (OPM), the probability-weighted expected return method (PWERM), or a hybrid of both.
These methods account for the unique characteristics of private company equity, including illiquidity and uncertainty about future outcomes. Independent 409A providers analyze your financials, compare your company to public peers, and apply the appropriate methodology to arrive at a defensible FMV. Their expert opinions on value are what qualify the valuation for IRS safe harbor protection.
What factors can affect the fair market value?
When valuing your company, 409A providers look at a few different factors:
How much your assets are worth, including intangible assets like intellectual property, proprietary technology, and brand equity
The present value of your future cash flows
How much common stock is worth at similar (comparable) companies
A 409A valuation is valid for a maximum of 12 months from its effective date, and its validity ends sooner if a material event (such as a new funding round, acquisition, or merger) occurs.
Why fair market value matters for startups
Your 409A valuation establishes the FMV of your common stock. That FMV sets the strike price on every stock option you grant. If the strike price is too low, you and your employees face serious tax problems.
When your team members understand why their shares are valued below the last funding round, they can make informed decisions about exercising options and planning for taxes.
FMV sets your option strike price
A strike price (also called an exercise price) is the fixed price an employee pays to buy a share when exercising a stock option.
A stock option's strike price cannot be lower than the FMV of the underlying stock on the grant date. If you price options below FMV, the IRS treats them as deferred compensation under Section 409A, which triggers immediate tax consequences for the option holder.
The cost of getting FMV wrong
Pricing below FMV is expensive. The IRS Section 409A guidance states that “the additional income tax is equal to 20 percent of the compensation required to be included in gross income.” This is on top of regular income tax, plus interest at the underpayment rate plus one percentage point.
The 20% is additional income tax on top of ordinary income tax and accrued interest, so the actual exposure is significantly higher than the penalty alone.
Why your FMV needs to be defensible
When establishing FMV, third-party appraisers are obligated to come up with a number that is, in fact, fair. While you and your shareholders may see certain benefits from a lower FMV, the IRS may reject valuations it finds “grossly unreasonable.”
If the IRS rejects your company's valuation, it revises the tax treatment of every stock option issued under that valuation. Employees who received incorrectly priced options could be taxed immediately and may owe penalties.
While very early-stage startups may be able to approximate the value of their own stock, this FMV isn't protected under IRS safe harbor. The safe harbor establishes a presumption that the IRS will accept the FMV unless it is deemed to be “grossly unreasonable.” For your company's FMV to qualify for safe harbor under IRS regulations, you must have a 409A issued from an independent appraiser.
Because equity grants are getting larger, an accurate FMV and the defensible strike price it sets matter more than ever. In H2 2025, the median size of initial equity grants for individual contributors rose nearly 11% over the prior two years, while median salaries grew 6.4%.
A defensible, audit-ready 409A FMV pays off during due diligence and audits. ButterflyMX, for example, found that a reliable valuation process made a real difference when facing an audit:
"The requirements were very manageable—as streamlined as it could be when it came to pulling data. We passed that segment of the audit with flying colors. Carta helped us conquer it."
- Bary Dunn, CFO and Head of Strategy, ButterflyMX
How founders keep FMV accurate and defensible
Staying audit-ready comes down to a few consistent practices:
Get a 409A valuation from a professional appraiser: Don't rely on rough estimates or guesswork.
Refresh after material events: Funding rounds, acquisitions, or revenue shifts require updates.
Keep your cap table current: Your cap table records every share issued.
Document your methodology: Keep the appraisal report and supporting materials on file.
Carta’s equity management platform connects your cap table, 409A valuations, and equity issuance in one platform, saving time, reducing errors, and keeping you compliant.
Getting fair market value right
FMV is the neutral price that emerges when two informed parties trade without pressure. For private companies, it's set by an independent 409A valuation and drives option strike prices, tax outcomes, and compliance.
Getting FMV right protects your employees from unexpected tax bills and protects your company from audit risk. An audit-ready 409A valuation gives you a defensible number and a safe harbor, so you can focus on building your company instead of worrying about compliance.
Request a 409A valuation demo to see how Carta handles the process.
Frequently asked questions about fair market value
What is fair market value in simple terms?
Fair market value is the price a willing buyer would pay a willing seller for an asset when both parties have reasonable knowledge and neither is under pressure to transact.
How is the fair market value of private company stock determined?
For private companies, fair market value is determined through a 409A valuation conducted by an independent appraiser. The valuation uses methodologies such as the Market Approach (including the Guideline Public Company method and OPM backsolve), the Income Approach, or an Asset Approach.
How often do you need a new 409A valuation?
A 409A valuation is valid for the lesser of 12 months from its effective date or the next material event, which would include such events as a funding round, acquisition, or significant change in business. A standalone 409A valuation typically takes 1-3 weeks to complete.
What is the difference between fair market value and fair value?
Fair market value is the standard for income tax purposes, while fair value is used for financial reporting under accounting standards (see the FMV vs. fair value section above).
How is fair market value different from a funding round valuation?
A funding round prices preferred stock, which includes extra rights like liquidation preferences and anti-dilution protection. FMV measures common stock, which lacks those protections and is typically valued lower.
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