What it is
A 409A valuation is an independent, IRS-referenced appraisal that sets the fair market value (FMV) of a US company's common stock. That FMV becomes the minimum strike price for stock options you grant.
Facts
- Named after Section 409A of the US Internal Revenue Code.
- Options must be granted with a strike price at or above the 409A FMV to avoid harsh tax penalties.
- A 409A is valid for 12 months or until a material event (like a new priced round), whichever comes first.
- Common stock FMV is typically well below the preferred price investors paid.
Who it's for
US C-corps that grant stock options to employees; required before issuing options.
How it helps you
A defensible 409A gives you safe harbor, shifting the burden to the IRS to disprove your valuation, and lets you grant options with low strike prices legally.
Caveats
Don't skip or DIY it, granting options below FMV triggers immediate taxation plus a 20% penalty on employees. Refresh it after each priced round.
Conclusion
A 409A valuation is a compliance must-have before granting US stock options; use a qualified provider for safe-harbor protection and refresh it after material events.