What is FMV for a Private Company Stock?
The Fair Market Value (FMV) is the accepted current value of one share of a private company's common stock. It represents what the stock would be worth on the open market. The FMV is primarily used for tax purposes when exercising employee stock options. Taxes are computed based on the spread between the FMV and the exercise (strike) price of the options. The FMV is also used to determine the exercise price when a company grants options to its employees.
How is the FMV determined?
The FMV is determined by a 409a Valuation which is required by law to be updated every 12 months or any time a company closes a funding round. It is calculated either by the company internally or by an independent firm. The 409a will be valued based on similar publicly traded companies, the company's cash flows, or the company's assets - typically a mix of all.