If your company grants stock options, “409A” is one of those terms you cannot afford to treat as someone else’s problem. A 409A valuation establishes the fair market value of your common stock so you can set option strike prices defensibly. Get it right and your option grants are clean. Get it wrong — or skip it — and you expose your team to penalties that fall on the option holders, not just the company.
What a 409A valuation is
Section 409A of the Internal Revenue Code governs deferred compensation, and stock options priced below fair market value can be treated as deferred compensation gone wrong. To avoid that, you need a defensible fair market value for your common stock at the time you grant options.
An independent 409A valuation produces that number. Done properly, it gives you a safe harbor: a presumption that your strike price is reasonable, which the IRS would have to overcome rather than you having to prove.
When you need your first one
The short version: before you grant your first stock options. That usually means around the time you are setting up your option pool and preparing to hire, or shortly after a priced financing round establishes a real market price for your preferred stock.
Granting options without a current valuation is the most common avoidable mistake. The fix is not retroactive — you want the number in hand before, not after.
When you need to refresh it
A 409A is not a one-time event. A valuation is generally treated as reliable for up to twelve months, but two things shorten that window:
- A new priced round. A financing that changes your company’s value is a classic trigger. The price investors just paid is direct evidence of value, and your common-stock valuation should reflect the new reality.
- A material event. A significant acquisition offer, a major change in your business or financials, a secondary sale of stock, or anything else that meaningfully moves the company’s value can require a fresh valuation before the twelve months are up.
A reasonable rule of thumb: refresh at least annually, and again whenever something happens that a buyer would care about.
Where cross-border comes in
If your cap table or your team crosses borders — foreign founders, employees granted equity while living abroad, a holding company outside the U.S., or a restructuring that moves where value sits — the valuation and the tax treatment of the equity get more involved. The 409A still anchors the U.S. strike price, but the surrounding planning (how and where equity is taxed, and what reporting follows) deserves to be handled together rather than in two silos.
The practical takeaway
If you grant options, you need a current 409A, you need it before the grant, and you need to refresh it after a round or a material event. We do defensible 409A valuations and can flag when yours is due — book a free consultation and we will look at your situation.
