Definition
What is a 409A Valuation?
A 409A valuation is an independent third-party appraisal of a private US company's fair market value (FMV) of its common stock. Required under Internal Revenue Code Section 409A to set the strike price of stock options. Without it, employee stock options can trigger massive penalty taxes.
Why required
Why 409A matters.
- IRS requires options to be granted at FMV strike price
- Without valid 409A: options treated as deferred compensation
- Penalty: 20% federal tax + interest on entire value at vesting (not just gain)
- Safe harbor only if 409A is done by independent qualified appraiser
- Required at least annually, or at any 'material event' (priced round, etc.)
Process
409A process.
Typical steps:
- Engage qualified appraiser (independent CPA, valuation firm)
- Provide: cap table, financials, business plan, recent funding terms
- Appraiser uses methods: market approach (recent funding), income approach (DCF), asset approach
- Issues 409A report with FMV per share of common stock
- Valid 12 months OR until material event (next funding round, major change)
Cost
409A cost.
- Carta: ~$3,000/year
- Eqvista: ~$1,500-3,000
- Independent CPAs / appraisers: ~$2,000-10,000
- Quality varies widely — pick someone with audit defence experience
- BQP: $1,500-5,000 depending on complexity