409A valuation. Setting option strike prices.
A 409A valuation is an independent appraisal of common stock fair market value for a private company. Required by IRC Section 409A to set stock option strike prices. Without a current 409A, the IRS may impose major penalties on optionees. Standard cadence: annually, plus after material changes (financing rounds, M&A).
Start here.
Independent appraisal of private company common stock FMV.
IRC Section 409A penalizes options granted below FMV.
Valuation firms (Carta 409A, Aranca, KeyValueData, others). Typically $1,500-$5,000.
Annually, plus after material changes: financing rounds, M&A, key personnel changes.
Use of qualified independent appraiser provides safe harbor.
The full picture.
What 409A is and why
IRC Section 409A taxes "deferred compensation" not meeting specific rules. Stock options granted at below-FMV strike are deemed deferred compensation subject to 20% additional federal tax plus interest at the option holder level. 409A valuation establishes FMV; setting strike at or above the 409A FMV avoids the penalty.
What gets valued
Common stock fair market value for a private company. The valuation produces a per-share FMV that becomes the floor for stock option strike prices.
Who does the valuation
Independent valuation firms. Common providers: Carta 409A (most common for startups), Aranca, KeyValueData, EquityList, and specialized appraisers.
Methods
Various approaches per AICPA Practice Aid: market approach (comparable company multiples), income approach (DCF), asset approach (book value or net asset value). For early-stage companies with recent funding, the market approach using the post-money valuation is most common.
Cost
$1,500-$5,000 typical. Lower for early-stage companies with minimal valuation complexity. Higher for late-stage with multiple share classes.
Frequency
Annually at minimum. Plus after material changes: priced equity rounds, M&A, key product launches, significant revenue changes, material litigation.
Safe harbor
Section 409A provides safe harbor for valuations performed by qualified independent appraisers using accepted methods. Strike prices set at or above 409A FMV are deemed compliant.
Validity period
12 months from valuation date, or until material change. After material change, new valuation typically required before further option grants.
Common mistakes
Letting 409A expire and granting options. Setting strike below 409A FMV. Not getting new valuation after a priced round (the round itself changes FMV).
Common questions.
Do I need a 409A valuation?
When do I need it?
What if I miss it?
How much does it cost?
Who does it?
How long is it valid?
Does this affect founder stock?
What is a material change?
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