Fundraising
409A valuation (US)
An independent, IRS-compliant fair-market valuation of a US company's common stock, used to set the strike price for employee stock options.
In plain English
The number that says 'a share of common stock is worth $X today.' Required for granting options at a defensible strike price; without it, employees who get options can face tax consequences at grant rather than at exercise.
Example
A seed-stage startup raises $2M on a $10M post-money valuation. A 409A is performed; common stock is valued at $0.50 per share (typically 25-40% of preferred-share price at early stages). Options are granted at a $0.50 strike. The 409A is refreshed every 12 months or after a material event.
Why it matters
An out-of-date or absent 409A creates personal tax liability for option-holders. It's also the foundation of every option-grant decision a startup makes. Carta, Pulley, and Capdesk include 409A as part of their cap-table platforms; expect to pay $1,500-$3,000 per valuation.
Common mistakes
- Granting options without an active 409A — strike price is then 'defensible' only by gut, and the IRS may treat the grant as ordinary income
- Letting the 409A go stale past 12 months or skipping a refresh after a material event (priced round, major revenue milestone)
- Choosing the cheapest 409A provider when defending the valuation matters — exit due diligence will revisit it
- Confusing 409A with the post-money preferred valuation — they're related but the common stock value is typically much lower