Equity

Option Grant Date: Board Approval Sets the Strike, Not the Offer Letter

Startup finance leads: the grant date, not the offer letter, fixes your option strike. Learn which 409A can support a board-approved grant after a term sheet.

By 409.AI Team - 2026-10-10

# Option Grant Date: Board Approval Sets the Strike, Not the Offer Letter

A new hire signs an offer letter on June 1. It promises 50,000 options "at fair market value." The board doesn't meet until July 15. Between those two dates, the company signs a Series A term sheet. Which date sets the strike price, and which 409A valuation can support it?

This post is for the startup finance lead, the founder who handles equity admin and the lawyer who drafts the consents. The answer turns on one date, the date of grant, and it is almost never the date people think it is.

The grant date is when the corporate action is complete

Treasury's 409A regulation says the date of grant of a stock right is the date the company completes the corporate action needed to create the legally binding right. That action isn't complete until the maximum number of shares that can be purchased is fixed, and the minimum exercise price is fixed or determinable. The class of stock and the person receiving the option must also be identified. You can read the rule in [26 CFR 1.409A-1(b)(5)(vi)(B)](https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.409A-1).

The regulation for incentive stock options uses nearly the same test. Under [26 CFR 1.421-1(c)](https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.421-1), an option is granted when the corporation completes the corporate action offering the stock, and that action isn't complete until the maximum number of shares and the option price are fixed or determinable.

Put those two together and the offer letter loses. A letter that says "approximately 50,000 options at fair market value" fixes neither number. A board consent that approves 50,000 options for a named employee at an exercise price equal to the fair market value on that date does.

What usually goes wrong

Three patterns show up again and again in diligence:

  • The offer letter is treated as the grant, and the strike is set from whatever 409A was current on the day the letter went out.
  • The board approves a batch of grants "effective as of" an earlier date, to match the start date or the offer letter.
  • The consent approves the shares but leaves the price as "the fair market value as determined by the 409A report to be delivered," which means the price isn't determinable on the day of approval.

The first is a timing error. The second is close to backdating. The third leaves the grant incomplete until someone fills in the number, so the real grant date is whenever that happens.

Why the date matters for the strike

A discounted option, one with a strike below the fair market value on the grant date, is deferred compensation under 409A unless it meets an exception. The employee can owe regular income tax when the option vests, plus an additional 20 percent tax and interest. The company has withholding and reporting duties on top. Our post on the [IRS correction path for discounted options](https://www.409.ai/articles/discounted-stock-option-correction-notice-2008-113) covers what a fix looks like once the mistake is found.

So the question isn't only "do we have a 409A?" It's "does the valuation we're using speak for the grant date?"

Which valuation can support a July 15 grant?

For stock that isn't publicly traded, the regulation treats a valuation as unreasonable if it fails to reflect information available after the calculation date that may materially affect the company's value. It also treats a value as unreasonable once it was calculated with respect to a date more than 12 months earlier. The presumption of reasonableness for an independent appraisal applies only to an appraisal dated no more than 12 months before the grant. Both points sit in [26 CFR 1.409A-1(b)(5)(iv)(B)](https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.409A-1).

Back to the example. Suppose the company holds a February 28 report that puts common stock at $1.20 a share. The term sheet arrives in May. By July 15 the company has a signed priced-round document, an agreed pre-money valuation and a close date. A February report can't reflect any of that.

The calendar makes the 12-month clock the less important test here. The material event is the problem. A grant on July 15 at $1.20 is a grant at a price the company already has reason to doubt. Our post on [how often to get a 409A](https://www.409.ai/articles/409a-valuation-frequency-how-often-should-you-get-one) lists the events that should trigger a refresh, and a signed term sheet is on that list.

There are two clean ways out:

1. Wait for the update. Hold the grant until a refreshed report lands, then have the board approve it at the new strike. The hire's start date and their vesting commencement date can still be the earlier date, because those are separate from the grant date. 2. Grant now at a defensible price. If the term sheet has changed the picture, only an updated valuation can say by how much. Guessing a number between $1.20 and the round price isn't a method.

Turnaround matters here, since the board calendar is usually what pushes a grant out. We walk through the timeline in [how long a 409A takes](https://www.409.ai/articles/how-long-does-a-409a-valuation-take). If a round is close, ask for the update before the term sheet is signed so the report is ready when the board meets.

Vesting start is not the grant date

People confuse these constantly. The vesting commencement date is a term of the award. The board can set it to the employee's start date, or to the offer date, and it changes nothing about the grant date. A June 1 vesting start on a July 15 grant means the first tranche vests sooner. It doesn't mean the strike was fixed on June 1.

What the board can't do is describe the July 15 action as if it happened on June 1. The consent should carry the real date it was adopted, and the option agreement should show the same date.

Conditions, approvals and the start date

Some conditions do not move the grant date. Under the incentive stock option rule, a condition that needs no further corporate action is ordinarily a condition on exercise, so it doesn't stop the grant from happening. Vesting schedules are the usual example.

Others do. If an option is granted on the condition that the person becomes an employee, the option isn't granted before the day that person becomes one. A consent that approves a grant for a candidate who hasn't started yet should say so, and the date of grant then falls on the start date or on a later board action, depending on how the consent reads.

Stockholder approval has its own rule for incentive stock options. When the grant is subject to stockholder approval, the grant date is determined as if no approval were required, per section 424(i) and the regulation cited above. A plan that still needs a vote doesn't push the date out for ISO purposes, though it can raise other questions the company's counsel should answer.

The accounting date can differ

For financial statements, ASC 718 has its own grant date: the date the employer and employee reach a mutual understanding of the key terms and the employer is obligated, with the needed approvals in hand. That is often the same day as the tax grant date, and often it isn't. If service begins before the grant date, the company starts recording expense before then and trues it up to the grant-date fair value. Auditors care about the match between the board consent, the option agreement and the date used in the Black-Scholes inputs. Our [ASC 718 guide for startups](https://www.409.ai/articles/asc-718-stock-based-compensation-startup-guide) explains how the expense is measured once the date is set.

One mismatch shows up often in a first audit: the 409A report is dated to the valuation date, the board consent is dated a month later, and the accounting schedule uses the offer date. Three dates for one grant invites questions.

A practical close-out routine

Keep it boring and consistent:

  • Put the share count, the exercise price and the named recipient in the consent itself. Don't refer to a report that hasn't been delivered.
  • Date the consent the day it is adopted. Never use an effective-as-of date that precedes the action.
  • Before each approval, check the valuation date against two things: the 12-month limit and any event since the report, such as a signed term sheet, a bridge, a tender offer or a large revenue change.
  • If a grant is limited by the 100,000 dollar incentive stock option cap, compute it using the fair market value on the grant date, as in our post on the [ISO limit and the 409A](https://www.409.ai/articles/iso-100k-limit-409a-grant-date-fair-market-value).
  • Keep the offer letter vague on price: "an exercise price equal to the fair market value on the date of grant, as determined by the board."

That last line sets the right expectation with the new hire, and it doesn't commit the company to a number that a later valuation may overturn.

The takeaway

If a round is on the calendar, treat the board meeting as the deadline for a fresh valuation, not the offer letter. Ask for the update once the term sheet is in sight, approve grants on the date the board actually acts, and write the share count and price into the consent. One date on one document, matching the option agreement and the accounting schedule, is what an auditor or a 409A reviewer will look for first. If you need a report that is ready before the board meets, [409.AI's 409A valuations](https://www.409.ai/products/409a) are built for that timeline.

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