409A Valuation — What Founders Need to Know

A 409A valuation sets the fair market value of your stock for option grants. It’s a legal requirement that also impacts taxes, compensation strategy, and fundraising.

Why it Matters

A 409A valuation sets the fair market value (FMV) of your startup’s common stock. You need it to issue stock options legally — and skipping it can trigger IRS penalties, employee tax surprises, and cap table chaos

Founders Checklist

Get a 409A valuation before granting any options
Update the valuation every 12 months or after a funding round or major milestone
Use a qualified third-party provider (Carta, Pulley, Shareworks, Aranca)
Ensure the board formally approves the valuation
Store valuation reports in your data room and cap table tool

Founder Fails

Granted options before getting a 409A > tax exposure
Let 409A lapse after fundraising > stale FMV caused strike price gap
Didn’t update cap table > mispriced equity grants

When to ask for Help

Before granting stock options to any employees or contractors
If your company raises funding, grows rapidly, or changes materially
To evaluate timing around option grants and pricing
When planning to let employees exercise early
If transitioning to an ESOP or formal equity plan

Frequently Asked Questions

Q: What exactly is a 409A?
A: It’s an independent appraisal of your company’s common stock value. It sets the minimum strike price for stock options to avoid IRS penalties.

Q: What happens if I don’t have one?
A: If you grant options below fair market value:

The IRS can tax employees immediately
Add a 20% penalty
You could also trigger company liability

Q: When do I need to refresh my 409A?
A: Every 12 months or sooner if:

You raise a priced round
You land a large contract
You make major changes to your business model or exec team