Understand why every startup issuing stock options needs a 409A valuation, when to get one, and how the process works.

Fundraising & Equity

What Is a 409A Valuation?

Collated by Harry Prabandham

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A 409A valuation is an independent appraisal of a private company's common stock fair market value, required under IRS Section 409A for setting stock option exercise prices.
If you issue stock options with a strike price below fair market value, employees face immediate tax liability on the discount and a 20% penalty tax under Section 409A.
Having a valid 409A valuation provides a safe harbor that protects both the company and employees from IRS penalties related to option pricing.
Every startup that grants stock options or other equity compensation must obtain a 409A valuation before issuing those grants.

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About the author

Founder & CEO

Founder and CEO of StartupCFO. MBA from Wharton, MS in Computer Science, and decades of experience building and advising venture-backed startups.