Fair Market Value (FMV)
Also: FMV, fair market value, 409A FMV
The price a willing buyer and willing seller would agree to, used to set strike prices, RSU taxation, and exercise spreads. For private companies, FMV is established by a 409A valuation.
FMV is a legal standard, not a single number. Public companies use the stock’s closing price or a volume-weighted average on a given date. Private companies hire an independent appraiser to issue a 409A valuation that fixes FMV for option-pricing and tax purposes for up to 12 months. FMV at exercise determines the ordinary income on an NSO and the AMT preference on an ISO.
Example: a 409A valuation sets the common share FMV at $12. An employee exercises 5,000 NSOs at a $3 strike the same week. The $45,000 spread is the taxable event. If the private company closes a later round at $22 preferred, the 409A may reprice to roughly $15 or $16, not $22, because of the preferred-to-common discount.
Common mistake: assuming the last preferred round price equals FMV. Common stock usually trades at a 20% to 40% discount to preferred due to liquidation preference and other rights. Acting on preferred pricing overstates tax exposure and understates exercise gains.
FMV matters at every grant, exercise, vest, and sale. Track it alongside the strike and the grant date.