So, You Need a 409A — Here’s What That Actually Means 

At some point in your company’s growth, you’ll need a 409A valuation. 

Maybe you’re about to issue your first equity grants. Maybe you’ve just closed a round. Whatever the trigger, it’s important to get your 409A valuation right and avoid costly mistakes. 

What a 409A Actually Is 

A 409A valuation is an independent appraisal that sets the fair market value (FMV) of your company’s common stock, which is the kind used for employee options. 

It’s separate from your fundraising valuation. Investors buy preferred shares with rights and protections. Common shares don’t carry those privileges. A 409A accounts for that difference and gives you a defensible price per share for option grants. 

The goal isn’t to mirror your last round’s number; instead, it’s to build a valuation that holds up under audit or due diligence. 

Why Your 409A Valuation Matters  

409A valuations exist because of IRS rules around deferred compensation. In practice, that means the strike price for employee options must be at or above fair market value. 

If it’s not, the IRS treats those options as immediate taxable income, and your employees could owe: 

• Ordinary income tax (right now, not later),
• Interest, and
• A 20% federal penalty.  

That’s brutal for your team and not great for your reputation as a founder. 

So yes, it’s a compliance requirement. But more than that, it can be a trust mechanism. A 409A valuation signals that your ownership data, and your employees’ equity, are grounded in something defensible. 

 

When to Get a 409A Valuation  

The most common triggers for when you should obtain a 409A valuation are: 

• Before your first option grants.
• Every 12 months to maintain safe-harbor protection.
• After a material event, like a new funding round, product launch, or big shift in financial performance.

Think of it like a health check. You don’t wait for something to break before you update it. 

What Goes into Obtaining a 409A Valuation 

A proper valuation blends numbers and narrative: 

• A clean cap table (updated and verified). 

• Financial statements and forward projections. 

• Information on your market, competition, and risk factors. 

• Documentation on financing or structural changes. 

Those inputs feed one or more accepted valuation models: Income, Market (Backsolve), or Asset-based — depending on your stage and data maturity. 

Why FMV Changes (Even When You Haven’t) 

Founders often assume that if their business hasn’t changed, their valuation shouldn’t either. But markets move even when you don’t. 

Comparable companies rise or fall. Sector sentiment shifts. Interest rates change. A defensible 409A captures those external forces, not just your internal metrics. The number isn’t a judgment — it’s a snapshot of your company in a moving ecosystem. 

Don’t Fall for “One-Click” Valuations 

You’ll see offers for instant or automated 409A reports. But speed isn’t a substitute for defensibility.  Algorithmic valuations often skip qualitative context, like leadership experience, strategy, or market dynamics, that a true third-party appraiser weighs carefully. 

If your 409A valuation ever gets audited, you’ll likely need more than a spreadsheet. You’ll need a story that makes sense. 

A 409A valuation isn’t about checking boxes. It’s about showing your company takes ownership seriously. If you want to understand how 409A valuations work, what goes into them, and how to avoid common mistakes, download our free 409A Valuation Guide. 

  Need a 409A valuation? Talk to our team to get started.  

409A valuations are conducted by a third party. 

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