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    US · United States

    409A Valuation

    Also called: 409A, Fair market value valuation

    TL;DR

    An IRS-required independent valuation of a private company's common stock, used to set the strike price for new option grants.

    Named after Section 409A of the US tax code, a 409A valuation establishes the fair market value of common stock so option grants can be priced compliantly. Failing to perform a 409A or pricing options below fair market value triggers severe tax penalties for option recipients.

    409A valuations are typically refreshed annually or after material events (financing, M&A, significant operational change). The 409A FMV is almost always lower than the preferred-share price from the most recent priced round, usually a discount of 30 to 80% depending on stage and company maturity.

    Worked example

    After a $50M post-money Series B, the 409A appraiser sets common stock at $1.10/share (vs preferred at $4.50/share, a typical ~25% common discount). New employee options issued at $1.10 strike; if FMV doubles in 18 months, exercising creates a 1.0×-spread tax event.

    Common pitfalls

    • •Skipping 409A and triggering severe employee tax penalties.
    • •Letting 409A go stale and granting options at outdated strike prices.
    • •Confusing 409A FMV with the preferred-share price from the last round.

    When this shows up in a pitch deck

    Operational hygiene; appears in due diligence as part of clean cap-table review.

    Related terms

    Strike Price

    The fixed price at which an option holder can purchase a share, set at fair market value on the grant date and locked in for the option's life.

    ISO

    A US tax-advantaged stock option for W-2 employees, eligible for long-term capital-gains treatment if holding-period requirements are met.

    NSO

    Non-Qualified Stock Options, a more flexible US option type than ISOs, available to contractors and advisors but without the same tax-advantaged treatment.

    Common Stock

    The base equity class held by founders and employees, with voting rights but no preference rights or dividends.

    Preferred Stock

    The equity class issued to investors, carrying special rights such as liquidation preference, anti-dilution protection, and protective covenants.

    Use 409A Valuation in your next pitch deck

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