The 25 Most Common 409A Questions
1. Do I need a 409A valuation before my first hire?
Yes, if you are offering stock options as part of their compensation. The 409A must be completed before the option grant date. You cannot grant options and then get the 409A afterwards.
2. Can I use my fundraising valuation as my 409A?
No. The preferred stock price in a funding round reflects the value of preferred shares with liquidation preferences and other rights. A 409A is an independent appraisal of common stock FMV, which is always lower than the preferred price.
3. What is the difference between a 409A and a 409(p) valuation?
A 409A valuation establishes the FMV of common stock for option pricing. A 409(p) is an annual test for Employee Stock Ownership Plans (ESOPs) to ensure that disqualified persons do not hold a disproportionate amount of synthetic equity. Different regulations, different purpose.
4. Can my CFO or a board member do the 409A?
No. The appraiser must be independent — no financial interest in the company. A CFO, founder, board member, or investor cannot serve as the appraiser. Using an insider as the appraiser disqualifies the valuation from safe harbor protection.
5. How long is a 409A valid?
Twelve months from the valuation date, or until a material event occurs — whichever comes first. Material events include closing a new funding round, a significant acquisition offer, or major changes in financial performance.
6. What happens if I grant options after my 409A expires?
Options granted on an expired 409A do not qualify for safe harbor protection. If the IRS challenges the strike price, employees could face the 20% excise tax and immediate ordinary income tax on the spread. You must complete a new 409A before making any grants after expiry.
7. Can I grant options at a lower price than the 409A FMV?
No. The 409A establishes the minimum strike price. Granting options below this price triggers immediate §409A penalties for employees. You can grant options at or above the 409A FMV.
8. My investors say the 409A is too high — what can I do?
The 409A is an independent appraisal. If you believe the conclusion is incorrect, you can request revisions by providing additional data or comparables that support a lower value. However, the appraiser must exercise independent judgment — they cannot simply lower the value to what you prefer without factual support.
9. Do I need a 409A for restricted stock units (RSUs)?
RSUs delivered at vesting are subject to ordinary income tax at the FMV of the stock at vesting — not §409A per se. However, the FMV used for withholding purposes should be consistent with a contemporaneous 409A valuation. For private company RSUs with a future liquidity condition, §409A may apply.
10. Does a 409A protect contractors and advisors as well as employees?
Yes. §409A applies to stock options and deferred compensation granted to independent contractors and advisors as well as W-2 employees. Your 409A provides safe harbor protection for all grants, regardless of worker classification.
11. We just got acquired. Do we still need a 409A?
If the acquisition is complete and you are no longer issuing options, you don't need new ones. However, any options outstanding at acquisition will be treated per the merger agreement. If you have unvested options that will convert to acquiror equity, those may require a new valuation.
12. What is the "backsolve" method?
The backsolve method derives the total enterprise value implied by your most recent preferred stock transaction. By working backwards from the known preferred stock price and the OPM allocation model, the appraiser can infer a consistent enterprise value and allocate it to common stock. It is a valid and commonly used secondary method, especially at Seed and Series A.
13. Can I get a 409A if I have no revenue?
Yes. Pre-revenue companies obtain 409A valuations regularly using the asset approach and market comparables. The resulting FMV will reflect the company's net assets, IP, team, and market position, calibrated against comparable early-stage transactions.
14. How does the 409A affect my cap table?
The 409A does not change your cap table. It establishes the strike price at which options can be granted. Options granted at the 409A FMV are reflected in your cap table as issued options at that strike price.
15. What if I disagree with the 409A conclusion?
You can request that the appraiser explain their methodology, comparable company selection, and assumptions. If you have specific factual information (a recent comparable transaction, updated financial data) that supports a different conclusion, provide it. The appraiser will consider it and may adjust. You can also get a second opinion from a different appraiser.