409A Valuation FAQ

What is a 409A valuation?

A 409A valuation is an independent appraisal of a private company's common stock fair market value (FMV), performed so the company can price stock option grants at or above FMV as required under IRC §409A. It's the standard way a private company establishes a defensible strike price without a public trading price to rely on.

Why do startups need a 409A valuation?

Options granted below fair market value can be treated as deferred compensation under §409A, triggering immediate income recognition for the holder plus a 20% additional tax and interest penalties. A 409A valuation, especially one meeting the independent-appraisal safe harbor, shifts the burden of proof to the IRS to show the value was unreasonable, rather than leaving the company to defend an internal estimate.

How much does a 409A valuation cost?

Cost depends on company stage and cap-table complexity. See pricing on 409a.ai for current offerings. Value8's service is done-for-you: Value8's appraisers prepare the final signed report for you, drawing on cap table data the company already maintains, which removes the data-gathering overhead that drives cost and delay in a traditional engagement.

How often do I need a new 409A valuation?

Generally whichever comes first: 12 months after the valuation date, or a material event: a new priced round, a significant change in financial performance or business plan, a term sheet, or another development that could reasonably be expected to change the company's value. Granting options against a stale valuation forfeits the safe harbor.

What is a safe-harbor 409A valuation?

"Safe harbor" refers to a presumption of reasonableness under §409A Treasury regulations. A valuation that qualifies, most commonly a written independent appraisal no more than 12 months old, shifts the burden to the IRS to prove the value was grossly unreasonable if it's ever challenged. A valuation that doesn't meet a safe-harbor method leaves the company relying on its own facts and circumstances to defend the price if challenged.

What's the difference between a new 409A and a refresh?

There's no separate legal category called a "refresh": it's simply a new valuation. Companies use the term for a routine 12-month update when nothing material has changed, as opposed to a valuation triggered by a specific event (financing, material business change). Either way, the new valuation is what restarts the safe-harbor clock.

Who needs a 409A valuation?

Any private company granting stock options or other equity compensation subject to §409A to US taxpayers, including non-US companies granting options to US citizens or US tax residents. Companies that are pre-option-grant, or that only ever grant at a value already independently substantiated, are the narrow exceptions; in practice, almost any company running an option pool needs one before its first grant.

What methods are used in a 409A valuation?

Two layers: first, estimating total equity value (an income approach like discounted cash flow, a market approach using comparable companies or transactions, or occasionally an asset approach, often blended with weights into one consolidated value); second, allocating that value across the cap table's share classes to the class being priced. The standard allocation method for most venture-backed companies is an Option Pricing Model (OPM) backsolve, which prices the cap table's liquidation waterfall as a series of option breakpoints and solves so the model matches a known reference price (typically the latest priced round). A discount for lack of marketability (DLOM) is then applied to the result.

What is DLOM?

DLOM, the discount for lack of marketability, accounts for the fact that private-company stock can't be freely traded, unlike a comparable public security. It's typically derived from one or more published option-pricing models (e.g., protective-put or average-strike-put frameworks) and applied to reduce the pre-discount per-share value to the final reported FMV.

What happens if a company skips a 409A or uses the wrong value?

Options priced below the true FMV risk §409A deferred-compensation treatment: immediate income recognition for holders, a 20% additional tax, and interest. That's a real cost to employees and advisors who hold those options, and a cleanup problem for the company (and often a diligence flag for investors or acquirers). Skipping a 409A doesn't exempt a company from §409A; it just removes the safe-harbor protection if the price is ever challenged.

409A FMV vs. fair market value vs. preferred stock price: what's the difference?

"Fair market value" is the general concept; a "409A valuation" is a specific appraisal that establishes FMV for option-pricing purposes under that section of the tax code. The price paid in a priced financing round is the price for preferred stock, which carries liquidation preferences and other rights common stock doesn't have. It is not the same as common-stock FMV and is almost always higher than the 409A common value. A 409A valuation's job is precisely to translate from the known preferred price to the appropriate common value, accounting for that rights gap (which is what the OPM allocation step does).

Can I do a 409A valuation myself?

A company can produce an internal estimate, but doing so forfeits the independent-appraisal safe harbor described above: the IRS doesn't have to show the value was unreasonable; the company has to defend it on the facts. Most companies with any real option activity use an independent, qualified appraiser specifically to obtain that safe-harbor protection. Value8's 409A service is done-for-you: Value8's appraisers prepare the final signed report for you, rather than handing you a tool to model it yourself.

How long does a 409A valuation take?

Turnaround depends on the appraiser and how quickly the required business and financial information is assembled. Value8 delivers within 48 hours of a complete submission: because the cap table, option grants, and financing history are already on file, the appraisers skip the usual data-gathering step and go straight to preparing the final signed report for you.

Is Value8's 409A calculation engine independently verified?

Yes. The option-pricing and marketability-discount calculations behind a Value8 409A are tested against independently verified reference values, not just checked against themselves. That's an internal engineering control on calculation accuracy; what the customer receives is the final signed valuation report, not the underlying test data.

Does a 409A valuation affect stock-based compensation accounting (ASC 718)?

Yes: the 409A FMV is typically the starting input for the fair-value option-pricing calculation (e.g., Black-Scholes) used to recognize stock-based compensation expense under ASC 718 / IFRS 2. Keeping the 409A value and the cap table it was built from in the same system as the expense calculation avoids re-entering the same figures twice and keeps the two consistent.

What is OPM backsolve, specifically?

The Option Pricing Model (OPM) backsolve treats each class of a company's capital structure as a call option on the company's total equity value, with a strike price set at the breakpoint where that class's claim on exit proceeds begins. It then solves for (or "backsolves") the total equity value and/or volatility assumption that makes the model's output for a reference class, usually the most recently priced preferred round, match that round's known price. The same model, applied across all breakpoints, yields an implied value for common stock, which (after a marketability discount) becomes the 409A FMV.

General information, not legal or tax advice. Confirm specifics with a qualified tax advisor or valuation professional.