409A Valuation
What a 409A Valuation is and why startups need one.
409A valuation is an independent appraisal of the fair market value (FMV) of a private company's common stock, named after Section 409A of the Internal Revenue Code. Startups use a 409A to set the strike price for stock options so that options are granted at or above FMV.
Why it matters:
Granting options below FMV can create significant tax penalties for recipients. A current 409A gives safe harbor because the IRS presumes that the valuation is reasonable. 409As are typically refreshed every 12 months or after a material event such as a priced financing.
Related terms: fair market value (FMV), strike price, ISO/NSO. See related glossary entries.
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