The Complete Guide to 409A Valuations

What is a 409A valuation?

A 409A valuation is an independent appraisal of the fair market value (FMV) of a private company's common stock. It takes its name from Section 409A of the US Internal Revenue Code, which governs non-qualified deferred compensation — and stock options priced below fair market value count as exactly that in the eyes of the IRS.

When your company grants stock options, the strike price — what employees pay to exercise — must be at least the fair market value of the common stock on the grant date. Public companies read that number off an exchange. Private companies have to establish it, and the 409A valuation is how they do it defensibly.

Three numbers get confused constantly, and they are not the same thing: the preferred price investors paid in your last round, your post-money valuation, and the common-stock FMV a 409A concludes. Preferred stock carries liquidation preferences, anti-dilution protection, and other rights that common stock doesn't have, so common FMV is typically well below the preferred price — often 20–60% of it for early-stage companies. That gap is legitimate, documented, and exactly what the 409A methodology exists to measure.

• It prices one thing: a single share of common stock, as of a specific valuation date.
• It is prepared for your company and board — it is private, not filed publicly.
• It is the foundation for tax-safe option grants and the number your auditors, acquirers, and future counsel will look for.

Do you need one — and when?

If you are a US private company (or grant options to US taxpayers) and you issue stock options or other equity compensation, you need a 409A valuation before those grants are priced. In practice the trigger is simple: you need it before your first option grant, not after.

There is no stage too early. Pre-revenue, pre-product companies get 409A valuations routinely — the methodology adapts to what exists. If you are unsure where you fall, the 60-second valuation quiz or the timing guide on when you need a 409A will place you.

IRS safe harbor, explained

Section 409A doesn't just ask you to price options at fair market value — it cares about how you determined that value. The regulations define safe-harbor methods that flip the burden of proof in your favor.

The one nearly every venture-backed company uses is the independent appraisal presumption: when a qualified, independent appraiser values the common stock, that valuation is presumed reasonable. If the IRS ever challenges your strike prices, it must prove the valuation was grossly unreasonable — a deliberately high bar — rather than your company having to prove it was right. Without safe harbor, that burden sits on you and your employees.

• The presumption holds for up to 12 months from the valuation date — or until a material event changes the company's value, whichever comes first.
• The appraiser must be independent: qualified professionals with no stake in the outcome.
• The valuation must be documented in a written report your board can rely on when approving grants — board reliance on the report is part of the protection.
• Two other safe harbors exist (the illiquid-startup 'insider' method and a binding-formula method), but the independent appraisal is the standard because it is the most robust in diligence and audits.

Every 409.AI 409A report is prepared for independent-appraisal safe-harbor reliance and reviewed by a valuation expert before it is finalized.

What happens if you get it wrong

The consequences of granting options below fair market value without safe-harbor support land primarily on your employees — which is exactly why boards insist on doing this correctly.

• Immediate income inclusion: discounted options are treated as non-compliant deferred compensation, taxed as ordinary income as they vest — not when exercised.
• 20% additional federal tax on top of ordinary income tax, applied to the option gains.
• IRS underpayment interest, at a premium rate, on the taxes deemed late.
• State add-ons in some states — California, notably, applies its own additional tax of up to 20% under its 409A-conforming rules.
• Deal friction: in every acquisition or financing, diligence asks for the 409A history behind your grants. Gaps become escrow holdbacks, repricing exercises, indemnities, and delayed closings.

A repricing or tender-offer cleanup after the fact costs far more — in legal fees, morale, and negotiating leverage — than maintaining a current, defensible valuation ever will. This section describes general federal and state treatment; confirm specifics for your situation with a tax advisor.

How the value is actually calculated

A credible 409A is not a single formula — it is a sequence of documented judgments. A typical venture-backed company's report walks through three stages: value the business, allocate that value across share classes, then discount for illiquidity.

1. Enterprise/equity value. The appraiser considers the standard approaches — market (comparable public companies and comparable transactions), income (discounted cash flow, for companies with meaningful forecasts), and asset-based (for the earliest stages). For a company that has recently raised a priced round, the round itself is the strongest evidence, which leads to the backsolve below.

2. Allocation via the option pricing model (OPM). Because preferred stock has liquidation preferences and conversion rights, each share class's value depends on how big the eventual exit is. The OPM treats each class as a series of call options on total equity value, splitting value at every 'breakpoint' in your cap table's waterfall. The backsolve calibrates this model so that the preferred class is worth exactly what investors just paid — solving backwards from your round price to an implied total equity value, and out of that, a common-stock value.

3. Discount for lack of marketability (DLOM). A share you cannot sell tomorrow is worth less than a freely traded one. The DLOM quantifies that using put-option models — Finnerty and Chaffe are the standards — typically landing in the 20–35% range depending on stage, volatility, and time to a liquidity event. The result: the concluded FMV per common share on the cover of your report.

Every input — comparable set, volatility, expected time to exit, breakpoints — is documented so an auditor can trace the conclusion. That documentation is what separates an audit-defensible report from a number in a spreadsheet. You can see how these pieces fit together in a real, redacted 409A report.

The process and timeline

The traditional 409A process — weeks of email, document chasing, and analyst back-and-forth — is a workflow problem, not a valuation problem. A modern process compresses it to three steps:

Once the final report is delivered, your board approves option grants relying on it — grant approvals should always follow, not precede, the valuation date coverage. Full pricing and delivery options are on the pricing page.

How long it lasts — and what triggers a refresh

A 409A valuation is good for up to 12 months from its valuation date — or until a material event changes the company's value, whichever comes first. 'Material event' is judged by substance, not by label. The common triggers:

• Closing a new priced financing round (the most common trigger by far)
• A large SAFE or convertible-note raise at terms implying a meaningfully different value
• Receiving a serious acquisition offer or signing an LOI
• A secondary sale or tender offer where shares change hands at a new price
• A major inflection in the business — revenue step-change, flagship contract, regulatory approval, or a significant downturn
• Missing your forecast badly in either direction, or a major pivot

The practical rule most boards follow: refresh annually while granting options, and refresh immediately after any priced round before the next batch of grants. If you are between rounds and something significant just happened, assume it is material until someone qualified tells you otherwise — the timing guide walks through the common scenarios.

What a 409A valuation costs

Across the market, 409A pricing follows the provider model. Independent valuation firms typically quote $3,000–$10,000+ per report. Cap-table platforms bundle 409As into subscriptions that commonly work out to $2,000–$3,500+ per year. 409.AI publishes flat prices, tiered by how much your company has raised:

Standard delivery is 7 business days with the draft in 24 hours; express delivery (1 business day) is a flat $500 add-on, and a QSBS attestation letter can be bundled for $500. What drives cost across the industry is complexity — more raised capital means more share classes, more breakpoints, and more scrutiny. What should not drive cost is opacity: if a provider won't publish a price, you are the price discovery. See the full breakdown on the 409A cost page or compare providers on the comparison hub.

409A vs. ASC 718 vs. your SAFE cap

Founders juggle several 'valuations' that answer different questions. Keeping them straight avoids both compliance mistakes and negotiation confusion.

The single most common founder confusion: a post-money SAFE cap is not your company's fair market value. It is a negotiated ceiling on the price at which a SAFE converts — an option on future preferred stock, not an appraisal of common stock. Your 409A common FMV will almost always be far below your SAFE cap, and that is normal, expected, and good for your employees' strike prices. The 409A and ASC 718 analyses share inputs, which is why getting both from one provider is faster and cheaper than splitting them.

Choosing a provider

Every provider will tell you their reports are audit-defensible. Four questions actually separate them:

• Is the price published? Quote-based pricing means you are negotiating against an information asymmetry.
• How fast is a real draft in your hands? Days matter when a board meeting or offer letter is waiting.
• Who reviews the work? Ask whether a named valuation professional signs off, and what happens if your auditor pushes back — audit support at $175/hour is a different conversation than $400+/hour.
• Is the methodology visible? You should be able to see the OPM allocation, backsolve calibration, and DLOM support in the report itself — not take them on faith.

We keep our comparisons public: see how 409.AI stacks up against Carta, Pulley, and other providers — or skip ahead and look at the actual deliverable.

Frequently asked questions

What is a 409A valuation?

A 409A valuation is an independent appraisal of a private company's common stock fair market value. Companies use it to set tax-compliant stock option strike prices under Section 409A of the US Internal Revenue Code and to support IRS safe-harbor treatment.

How much does a 409A valuation cost?

409.AI 409A valuation reports start at $899 USD. Pricing is tiered by how much capital your company has raised, and current pricing is shown on the pricing page.

How long does a 409A valuation take?

409.AI delivers a draft report in about 24 hours after intake is complete. The final expert-reviewed report is delivered in 7 business days on the standard timeline, with 1 or 3 business day express delivery available as an add-on.

How long is a 409A valuation good for?

A 409A valuation is generally valid for up to 12 months, or until a material event such as a new financing round occurs, whichever comes first. After a material event, a new valuation is typically needed.

How often do you need a 409A valuation?

While you are granting stock options, you generally need a fresh 409A valuation at least every 12 months and again after any material event that could change the company's value.

Are 409A valuations public?

No. A 409A valuation is a private report prepared for the company and its board to support option pricing. It is not filed publicly or disclosed the way public-company financials are.

Do I need a 409A valuation?

If you are a private company granting stock options or issuing common stock to employees, you generally need a 409A valuation to set a defensible strike price and qualify for IRS safe-harbor protection.

How is a 409A valuation calculated?

A 409A valuation estimates the company's enterprise value, then allocates it across share classes using an option pricing model (OPM), typically calibrated to the most recent financing through a backsolve. A discount for lack of marketability (DLOM) is applied using recognized models such as Finnerty and Chaffe.

What is the difference between a 409A valuation and ASC 718?

A 409A valuation sets the fair market value used for option strike prices. ASC 718 uses grant-date fair value to record stock-based compensation expense in financial statements. They rely on related analysis but serve different purposes, and many companies need both.

I've done a 409A elsewhere before or never completed one before, is that okay?

Of course! During the onboarding flow it will ask you to submit previous valuations so we can continue where you left off! First-time valuations are also welcome and you can skip this question.

What if I am not happy with my valuation?

If you have any concerns once you receive the report, you will be given the option to book a call with our team to discuss. We pride ourselves on fairness and will not adjust the valuation unless there is a clear, supported reason why. As these reports must be IRS defensible, we reserve the right to withhold from making any changes.

How do I know if I'm too early or too large for a 409A?

There is no stage too early for a 409A. We look at a variety of valuation methods and choose which is right based on the information provided. As companies grow, different valuations are used ensuring there is no company too large or too small.

I'm not sure if my information in my accounting software or cap table is accurate, should I still complete this?

No, definitely not. Just like submitting any other legal document, the onus for ensuring the information provided is accurate is on you. If our team sees incorrect or misleading information has been provided, we will not complete the valuation for your company. Integrity and fairness are at the core of our values.

What if I need audit defence?

Audit defence is available for an hourly fee of USD $175/hr. In this scenario, you would work directly with one of our valuation experts to complete the audit components together.