409A Valuation
A 409A valuation is an independent appraisal of a private company's common stock fair market value, required by the U.S. Internal Revenue Code Section 409A so the company can set the strike price on stock options it grants to employees. It is the basis for every option grant's strike price and is what allows the company and its option holders to avoid significant tax penalties on grants.
A 409A is typically performed by an independent third-party appraiser (Carta, Pulley, Aranca, Scalar, and others), and a valuation performed under one of the IRS safe harbor methods carries a presumption of reasonableness. The valuation must be refreshed at least once every 12 months, or earlier if a material event occurs (a priced round, an acquisition offer, a major financial shift, a significant pivot). In practice, most early-stage companies pay $1,500 to $5,000 for a 409A and refresh annually unless a round triggers an earlier one. The 409A price for common stock typically lands meaningfully below the most recent preferred price, often in the range of 20 to 40 percent below depending on stage, because common does not carry the liquidation preference and other protections of preferred.
Ryan's Take
Founders treat the 409A as a compliance box to check. Wrong frame. The 409A is what sets the strike price on every employee option you grant, which means it directly affects how motivating those grants are. A stale or sky-high 409A right after a hot round can make early hires' options feel like a tax bill instead of a reward. Plan the 409A refresh around your hiring cadence, not just your audit schedule. And if you raise a priced round, get a fresh one immediately so your next month's grants price correctly.
What founders get wrong: Skipping or delaying the refresh after a priced round and granting options at the old strike. Grants below fair market value trigger Section 409A penalties on the employee, including immediate taxation plus a 20 percent additional tax. The penalty falls on the option holder, not just the company.
Related: Preferred vs Common Stock · Option Pool · Cap Table · Vesting
FAQ
How often do you need a 409A valuation?
At least every 12 months, and immediately after any material event such as a priced funding round, acquisition offer, or significant change in the business. Most companies refresh annually plus after each round.
Who can perform a 409A valuation?
An independent qualified appraiser. Most startups use a 409A provider like Carta, Pulley, Aranca, or Scalar. Using a qualified independent appraisal is one of the IRS safe harbor methods.
Why is the 409A price lower than the preferred price?
Common stock does not carry the liquidation preference, anti-dilution protection, or control rights of preferred stock. That difference in rights produces a discount, often in the 20 to 40 percent range depending on stage.
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