Fair Market Value (FMV), in the context of private companies, refers to the price at which one share of the company's stock would be valued on the open market. Unlike public companies, private companies do not have readily available market prices for their stocks. Therefore, a mechanism called a 409A valuation is used to determine the FMV of a private company's stock. A 409A valuation is an independent appraisal conducted by an unbiased third-party appraiser to assess the value of a company's common stock. It is required to ensure that the company’s stock plan is in compliance with securities laws.

The 409A valuation process involves analyzing various quantitative and qualitative factors, such as the company's financial statements, cash flows, cap table, and industry comparables. Additionally, intangible assets like copyrights and trade secrets may also be considered. The valuation firm, often employing professional appraisers, estimates the enterprise value of the company and allocates it among the different equity types in the cap table. By dividing the enterprise value by the total number of shares, the fair market value of a single share of common stock can be determined. It's important to note that factors like illiquidity and restrictions on selling the shares may also affect the FMV.

Fair market value should not be confused with market value, which refers to the price at which an asset can be sold in an open marketplace. In the real estate industry, fair market value is used to estimate the current market price of a property by considering recent sales of similar properties.