What is 409A valuation? Definition, Formula & Benchmarks

What is 409a valuation?

A 409A valuation is an independent appraisal of a private company's common stock fair market value, named after the IRS tax code section that governs it. Companies use it to set the strike price on employee stock options. Getting one from a qualified provider creates a 'safe harbor' the IRS presumes reasonable.

Worked example

After closing a Series A, a company commissions a 409A valuation setting common stock fair market value below the preferred price, so option strike prices are lower for employees.

Why it matters for fast-growing companies

Setting option strike prices without a defensible 409A exposes the company and employees to IRS penalties and tax on 'discounted' options. A current valuation, refreshed at least annually or after each material event like a new round, keeps grants compliant and inside safe harbor. It's routine hygiene your finance lead should own.

Frequently asked questions

How often do you need a new 409A valuation?+

At least once every twelve months, and sooner after any 'material event' that could change your value, most commonly a new priced round, but also a major acquisition offer or a big change in financials. Relying on a stale 409A risks losing safe-harbor protection and mispricing option grants.

Why is the 409A value usually lower than the price investors just paid?+

Because investors buy preferred stock, which carries liquidation preferences and other rights that make it more valuable than common. The 409A appraises common stock, what employees get, so it's typically a discount to the preferred price. That gap is normal and is exactly what lets employees get low option strike prices.

409A valuation