Does your company need a 409A valuation?

If your company plans to issue stock options to employees, founders, or advisors, a 409A is not optional. This requirement exists to ensure equity grants are issued at a fair, well-supported price.  

For private companies and startups, particularly those with U.S. exposure, understanding when a 409A valuation is required, how it affects stock options, and what it costs can help prevent serious tax and compliance issues down the line.  

This guide breaks it down clearly.  

A 409A valuation is an independent assessment used to determine the fair market value of a private company’s common stock, primarily to ensure employee stock options are issued at compliant prices under U.S. tax law. This requirement stems from Section 409A of the U.S. Internal Revenue Code, which establishes the framework for valuing and taxing deferred compensation.

In practice, the valuation establishes the strike price at which stock options can be granted. If options are issued at a price below fair market value, employees may face immediate tax and penalty consequences. A compliant 409A valuation helps ensure regulatory compliance while protecting both the company and its option holders from adverse tax consequences.  

Why does Section 409a exist?

Before Section 409A was introduced, companies had significant flexibility in how they priced stock options. In many cases, options were issued at arbitrarily low values, creating opportunities for tax avoidance and inconsistencies in how equity compensation was valued across companies.  

Section 409A was introduced to bring structure, transparency, and fairness to the issuance of deferred compensation, such as stock options. It requires companies to rely on an independent and well-documented valuation of their common stock that reflects fair market value and aligns with accepted valuation standards.  

By enforcing these requirements, Section 409A reduces the risk of understated income and ensures that employees are not exposed to unexpected tax liabilities from improperly priced options. A properly conducted 409A valuation also provides safe harbor protection, meaning the IRS will generally accept the valuation unless it is clearly unreasonable.  

Who needs a 409a valuation?  

Companies that issue stock options must obtain a 409A valuation if they operate under U.S. tax rules, regardless of size or stage. This includes:  

•U.S. based startups and private firms  

• Non-U.S. companies with U.S. employees  

•Startups expanding into the U.S. market.  

•Companies offering stock options or equity incentives.  

Even very early-stage startups may need a 409A valuation for startup equity once stock options are involved.  

When is a 409a valuation required?  

A company typically requires a 409A valuation whenever it issues or updates equity-based compensation. This often begins when stock options are granted for the first time, as the company must establish a fair market value for its common stock before offering equity to employees or advisors.  

A new 409A valuation is also required for major corporate events that could materially impact the company's value. These events include fundraising rounds, mergers or acquisitions, periods of rapid growth, and preparations for an IPO or exit. In such cases, relying on an outdated valuation can increase regulatory and tax risk.  

In most cases, a 409A valuation remains valid for up to 12 months. However, if a material event occurs during that period, companies are expected to refresh the valuation earlier to ensure equity grants continue to reflect fair market value.  

Also read: Confused About Your Startup's 409A Valuation? We've Got Answers

How a 409a valuation impacts stock options?

A 409A valuation is essential for properly pricing and taxing stock options. It provides aand want to have a clear understanding of inputs, process,n independent determination of the company’s fair market value (FMV), ensuring that equity grants use an appropriate strike price and comply with IRS Section 409A rules.

When options are priced at or above FMV, employees avoid immediate income taxes that would otherwise apply to “bargain” grants issued below fair value. Companies also remain compliant, minimizing the risk of IRS penalties or audit challenges.

Without a current 409A valuation, stock options may fail as effective incentives and trigger unexpected tax burdens for employees and founders alike. A valid valuation upholds the fairness and defensibility of equity compensation, keeping it aligned with the company’s actual economic reality.

Does your company need a 409a valuation?

Any private company that is planning to grant stock options to their employees or other service providers who are US taxpayers will need a 409A valuation. The valuation is used to set the exercise price of the stock options, which must be at or above the fair market value of the stock in order to comply with the rules of Section 409A of the Internal Revenue Code.

If you have employees in the US that you want to grant equity to, you will need 409A, even if you are a foreign company.

How often do you need a 409a valuation?

Companies are required to perform a 409A valuation at least annually, or in the event of a significant occurrence that could impact the company's value. Such occurrences, known as "material events", may include new equity funding rounds, takeover offers, secondary sales of common stock, and significant changes in the company's financial prospects. Additionally, companies nearing an initial public offering may conduct 409A valuations more frequently, such as on a quarterly or even monthly basis.

Choose Qapita as your 409A valuation partner

Not all 409A valuation firms deliver the same rigor or reliability. Selecting the ideal partner goes beyond price. It involves evaluating their experience, methodology, and capacity to support sustained equity strategies. Businesses benefit from working with valuation partners who have proven expertise in startup and growth-rate valuations, as they face unique structural and compliance challenges.

Top partners master Section 409A rules and employ transparent, defensible methodologies that IRS audits. They deliver clear reports with audit-ready documentation, preparing companies for any regulatory scrutiny. Integration with cap table and equity management tools further eases compliance and administration.

Not sure where to start with 409A valuation? If you don't fully grasp the requirements and want a clear understanding of inputs, process, and next steps when it comes to 409A valuation, speak with Qapita's experts and receive your final report within two weeks.