Executive Summary
What is a 409A valuation?
A 409A valuation is an independent appraisal of a private company's stock value, required by the IRS for companies that grant stock options. It determines the fair market value (FMV) used to set your option strike price. The strike price must equal or exceed this FMV—otherwise, employees could face immediate tax and penalties. Companies typically get a new 409A every 12 months or when something big happens (funding, acquisition, etc.).
You work at a startup. Your options have a strike price. Where did that number come from? For private companies, it comes from a 409A valuation—an independent appraisal of what the stock is worth.
The bottom line: The 409A sets the floor for your strike price. Your company can't grant you options below that value (without triggering tax problems). It's done by an outside appraiser, usually every year. You don't control it. You just need to know: it's why your strike is what it is. See our full 409A guide for the technical details.
Why It Exists
The IRS wants to prevent companies from granting options with a strike price below the real value of the stock. If they did, you'd be getting a discount—and that discount would be taxable income right away. So the IRS says: use a 409A valuation to set FMV. If your strike equals or exceeds that, you're good. If not, you could owe tax and penalties.
Who Does It?
Your company hires an independent appraiser—a valuation firm. Common ones include Carta, Scalar, and various accounting firms. They're not affiliated with your company. They use standard methods (comparable companies, discounted cash flow, etc.) to estimate what a willing buyer would pay for the stock.
When Does It Happen?
| Trigger | Typical Timing |
|---|---|
| Annual | Every 12 months (common) |
| Material event | After a funding round, acquisition, or other big change |
| New plan | When the company first grants options |
409A valuations are valid for 12 months unless something material changes. A new funding round usually triggers a new valuation—often higher (more dilution, but more cash in the company).
How It Affects You
| Impact | |
|---|---|
| Strike price | Your strike is set at (or above) the 409A FMV at grant |
| Exercise cost | Higher 409A = higher strike = more you pay to exercise |
| ISO $100K limit | The limit uses grant-date FMV—so 409A sets how many shares count |
You don't get to pick the 409A. The company does it. You get what you get. But understanding it helps you know why your strike is what it is—and why it might change after a funding round.
409A vs. What Investors Pay
Investors might pay $10 per share in a funding round. Your 409A might say $5. Why? Preferred stock (what investors get) is worth more than common stock (what you get). It has liquidation preferences, voting rights, etc. The 409A values your common stock—which is typically worth less than the preferred price.
Frequently Asked Questions
Can I see the 409A?
Usually not. It's often confidential. But you can ask your company for the FMV per share at your grant date—that's what your strike should be based on.
What if I think the 409A is wrong?
You can't easily challenge it. The company relies on the appraiser. If the IRS audits and finds the valuation "grossly unreasonable," there could be penalties—but that's rare. The safe harbor methods (independent appraisal, etc.) protect most companies.
Does this apply to public companies?
No. Public companies use the stock price. 409A is for private companies that don't have a market price.
Disclaimer: This guide is for educational purposes. It does not constitute tax or legal advice.
Last Updated: March 2026 | Research Team: VestingStrategy