409A Valuation
Definition
An independent appraisal of a private company's common stock fair market value, required by Section 409A of the IRS tax code. Companies must get a 409A valuation at least annually (or after any material event like a fundraise) to set compliant option strike prices. If options are granted below FMV, both the company and employee face severe tax penalties.
Real-World Example
A startup raises a Series A at $10/share for preferred stock. The 409A valuation firm assesses the common stock at $3/share (applying discounts for lack of marketability and minority interest). All options granted after this valuation have a $3 strike price.
Common Mistake
Thinking a low 409A valuation is always good news. While a lower 409A means a lower strike price for new hires, it also signals that independent assessors see significant risk or discount in the company. An unusually low 409A relative to the last fundraise might indicate structural issues with the cap table.
Why It Matters
409A valuations directly determine your option strike price. They also protect both you and the company from IRS penalties. Ask when the last 409A was done — if it was before a recent fundraise, your strike price may be about to increase significantly.
Related Terms
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