Why the usual methods fall short
Most business valuations lean on revenue or earnings multiples from comparable companies. A company still in preclinical or clinical development has neither, and its closest public comparables can swing sharply on a single trial result. The valuation has to be built from different evidence.
Establishing enterprise value
Backsolve from the latest round
If the company has recently closed a priced round with outside investors, that transaction is the best available evidence of value. The backsolve method works out the total equity value that is consistent with the price those investors paid, taking account of the rights attached to their shares.
Risk-adjusted net present value
An rNPV model projects the cash flows of each program through development and commercialization, then weights them by the probability of clearing each clinical and regulatory stage. It is the standard way to value a pipeline and becomes more important as programs advance and as time passes since the last round.
Market and asset evidence
Comparable public companies, licensing deals, and acquisitions at a similar stage serve as a cross-check. For very early companies with little outside investment, the amount invested to date can be a reasonable floor.
Allocating value to common stock
Enterprise value belongs to all share classes together. The 409A conclusion is the value of one share of common stock, so the total has to be allocated.
- Option pricing method (OPM). Treats each share class as a call option on the company's value, with strike prices set by the liquidation preferences. It suits companies whose exit is some years away and uncertain.
- Probability-weighted expected return method (PWERM). Models specific outcomes, such as an IPO, an acquisition, or a wind-down, and weights them by likelihood. It suits companies with a visible path to an exit.
- Hybrid. Combines the two, often with one or two defined scenarios and an OPM for everything else. It is common for clinical-stage companies facing a binary event.
A discount for lack of marketability is then applied, because common shares in a private company cannot be freely sold.
Events that move the value
A 409A valuation supports grants for up to 12 months only if nothing material changes. In life sciences, material events include:
- A new financing round or a signed term sheet.
- Clinical data readouts, positive or negative.
- Regulatory decisions, such as clearance to begin a trial.
- A licensing, partnering, or collaboration agreement.
- An acquisition approach.
Because these events are often scheduled, it is worth planning grant dates and valuation dates around them.
What your valuer will ask for
- A fully diluted cap table and the terms of each share class.
- Details of the latest financing and any term sheets under discussion.
- A pipeline summary: indication, stage, and expected milestone timing for each program.
- Budget, cash runway, and financial projections.
- Any licensing or collaboration agreements.
Pre-revenue and clinical-stage companies are a core part of our practice. See our 409A valuation service, or, if you are a UK company, our guide to 409A valuations for UK companies.
Frequently asked questions
Can a company with no revenue get a 409A valuation?
Yes. The valuation relies on evidence other than revenue: the price investors paid in the latest funding round, risk-adjusted projections for the pipeline, and the rights attached to each class of shares.
Why is common stock worth less than the preferred price?
Preferred shares carry rights that common shares lack, such as liquidation preferences and anti-dilution protection, and common shares in a private company cannot be readily sold. The valuation quantifies both effects, which is why common stock is typically valued below the latest preferred price.
Does a clinical data readout require a new 409A?
If the result materially changes the company's prospects, yes. Positive or negative, a significant readout is the kind of material event that can end the safe harbor period of an existing valuation.
Should we grant options before or after a milestone?
That is a decision for the board and its advisers. From a valuation standpoint, a grant made before a known value-changing event should rest on a valuation that fairly reflects what was known at the grant date.
This page is general information, not tax or legal advice. It reflects US and UK rules as we understand them in October 2026; confirm how they apply to your company with your advisers.