The Complete Guide to 409A Valuations for Startups

What Is a 409A Valuation?

A 409A valuation is an independent appraisal of the fair market value (FMV) of a private company's common stock. Required under Section 409A of the Internal Revenue Code, these valuations establish the minimum exercise price for stock options and other deferred compensation. Without a compliant 409A valuation, companies risk significant tax penalties for both the company and its employees — including a 20% additional tax plus interest on affected option holders.

When Do You Need One?

Every company issuing stock options needs a 409A valuation before the first grant and should update it at least annually, or after any material event such as a new funding round, significant revenue milestone, or major change in business model. Most audit firms and legal counsel recommend refreshing your 409A within 12 months of the prior valuation or whenever a qualifying event occurs. Pre-revenue companies raising on SAFEs and convertible notes still need a 409A if they plan to issue equity compensation.

What to Expect From the Process

A typical 409A engagement takes 2–4 weeks from kickoff to final report. The process begins with document collection — your cap table, financial projections, recent term sheets, and any material contracts. Your valuation provider will analyze comparable public and private transactions, apply appropriate valuation methodologies (typically a combination of income, market, and asset approaches), and deliver a comprehensive report that establishes safe harbor protection. The best providers will coordinate directly with your auditors to streamline year-end audit processes.

Choosing a Valuation Provider

Not all 409A providers are created equal. The cheapest options often use template-driven approaches that fail under audit scrutiny. The Big Four firms deliver institutional quality but charge accordingly and staff engagements with junior analysts. Look for a provider that offers senior-level attention, understands your specific capital structure, and has a track record of audit acceptance. Credentials matter — ASA (Accredited Senior Appraiser) and CFA (Chartered Financial Analyst) designations indicate rigorous training in valuation methodology and ethics.