How to get a 409A valuation
Price your options below fair market value and the IRS treats the discount as deferred compensation - with a 20% penalty on top. A clean 409A is how you avoid that.
What a missing or stale 409A costs
A 409A valuation sets the fair market value (FMV) of your common stock, which becomes the minimum strike price for the options you grant. Section 409A of the tax code treats options granted below FMV as nonqualified deferred compensation - and the consequences land on the employee, not just the company.
Why a defensible 409A is hard
- Private common stock has no market price, so value has to be estimated through models, not looked up.
- A single enterprise value must be split across preferred, common, options, and warrants - each with different rights.
- Recent priced rounds value preferred stock; common stock is worth less and needs a discount for lack of marketability (DLMM/DLOM).
- The valuation goes stale after 12 months or any material event, so it’s a recurring obligation, not a one-time task.
- Do it yourself and you carry the burden of proving reasonableness; use a qualified appraiser and the burden shifts to the IRS.
The 409A Valuation Path
Five steps, in order
- 1
Confirm you need one, and on what cadence
You need a fresh valuation before your first option grant, at least every 12 months, and after any material event - a priced round, a term sheet, a large customer or product shift. Grants made against a current 409A are the ones that qualify for protection.
- 2
Assemble the inputs
Gather the cap table with all share classes and preferences, recent financials, the latest financing terms, and a forward forecast. Garbage in produces an indefensible number out.
- 3
Choose a valuation approach
Appraisers apply the market approach (comparable companies and transactions, or a backsolve from your latest round), the income approach (a discounted cash flow), or the asset approach for early, pre-revenue companies - often weighting more than one.
- 4
Allocate to common and apply a discount
Split total equity value across share classes using the Option Pricing Method (OPM), a Probability-Weighted Expected Return Method (PWERM), or a hybrid, then apply a discount for lack of marketability to reach common-stock FMV.
- 5
Establish safe harbor and document it
Use a qualified independent appraiser (or the illiquid-startup safe harbor) so the IRS must prove the number was grossly unreasonable to challenge it, then have the board adopt the report and record the refresh triggers.
Common-stock FMV per share
FMV per share = (Common-allocated equity value × (1 − DLOM)) ÷ Fully diluted common shares
After total equity value is allocated to the common class, a discount for lack of marketability (DLOM) reflects that private common stock cannot be freely sold. The result is the per-share FMV that sets your option strike price.
How Fintra supports the 409A process
| Step | What Fintra does |
|---|---|
| Confirm cadence | Equity tracks your last valuation date and flags the 12-month refresh and material-event triggers before you grant against a stale number. |
| Assemble inputs | The cap table, share classes, and preferences live alongside the ledger, so appraisers get a clean, current data package. |
| Choose approach | Live financials and forecasts feed the income and market approaches without a manual export scramble. |
| Allocate and discount | Grant records capture strike prices tied to each valuation, keeping the OPM/PWERM inputs consistent with the cap table. |
| Safe harbor and document | Board adoption, the valuation report, and refresh triggers are stored with a SentriAI-powered audit trail for diligence. |
Fintra does not replace the independent appraiser that safe harbor requires - it keeps the cap table, financials, and grant history clean so the appraisal is fast and the resulting strike prices flow straight into your equity and ASC 718 records.
Your 409A checklist
Before your next option grant
- Confirm your current 409A is under 12 months old and predates no material event.
- Refresh after any priced round, term sheet, or acquisition discussion.
- Provide the appraiser a reconciled cap table with all preferences.
- Include recent financials and a forward forecast in the input package.
- Confirm the appraiser is qualified so independent-appraisal safe harbor applies.
- Have the board formally adopt the valuation report.
- Set every option strike at or above the reported common FMV.
- Record the next refresh date and the events that would trigger an early one.
Frequently asked questions
What is a 409A valuation and why do I need one?
It is an independent appraisal of the fair market value of a private company’s common stock, named for Section 409A of the tax code. You need it to set option strike prices at or above FMV. Granting below FMV turns the discount into taxable deferred compensation for the employee, triggering ordinary income tax as the option vests plus a 20% federal penalty and interest.
How often do I need a 409A valuation?
At least every 12 months, and again after any material event - a new priced financing round, a signed term sheet, an acquisition offer, or a fundamental change in the business. Grants made while a valuation is current and event-free are the ones that keep safe-harbor protection; granting against a stale 409A reintroduces the under-pricing risk.
What is 409A safe harbor?
Safe harbor is a presumption that your valuation is reasonable, which shifts the burden of proof to the IRS - it can only challenge the number by showing it was grossly unreasonable. The most common route is a valuation by a qualified independent appraiser; illiquid, early-stage startups can also qualify when the valuation is performed by someone with appropriate qualifications.
What methods are used in a 409A valuation?
Appraisers typically apply the market approach (comparable public companies and transactions, or a backsolve from your most recent financing), the income approach (a discounted cash flow), or the asset approach for pre-revenue companies. Total equity value is then allocated across share classes using an Option Pricing Method or PWERM, and a discount for lack of marketability is applied to reach common-stock FMV.
Stay in the loop
One practical finance briefing a week - new guides, checklists, and benchmarks.
Keep your cap table 409A-ready
Fintra keeps the cap table, financials, and grant history clean so valuations are fast and strike prices flow to the GL. Free to start, no card required.
Talk to us