Fair Market Value (FMV)
Definition
The current estimated value of one share of company stock, determined by an independent appraisal. For private companies, this is established through a 409A valuation. For public companies, it is simply the current stock price. FMV is used to set option strike prices and calculate tax obligations.
Real-World Example
A startup hires an independent valuator who determines the FMV is $1.50/share. All options granted in the next 6-12 months use this as the strike price. When the company raises a Series B at a $5/share preferred price, the common stock FMV might be set at $2.00/share due to the liquidation preference discount.
Common Mistake
Confusing FMV of common stock with the per-share price from the latest fundraise. The fundraising price reflects preferred stock (which has extra rights like liquidation preferences). Common stock FMV is typically 60-80% lower than the preferred price, especially at early stages.
Why It Matters
FMV affects your strike price, your taxes at exercise, and how much your equity is really worth. Understanding that common stock FMV differs from the headline fundraising number prevents you from overestimating your equity value.
Related Terms
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