Why Material Events Invalidate Your 409A
A 409A valuation is a snapshot of your company's fair market value on a specific date. The IRS provides a 12-month safe harbor — an assumption that the FMV has not changed materially within that window. But certain events so fundamentally alter the company's value that this assumption breaks down. These are material events.
When a material event occurs, the safe harbor is immediately voided. Any option grants made after the material event but before a new 409A is completed are non-compliant — they are treated as having been granted without a valid FMV determination, exposing employees to §409A penalties.
Complete List of Material Events
Financing Events (Always Trigger New 409A)
- Closing a priced equity round: Any SAFE conversion, seed round, Series A through Series N — the moment a round closes, the prior 409A is invalidated. This is the most common material event.
- Closing a convertible note: While individual note closings may not always trigger a new 409A if the terms are similar to existing notes, a material bridge round often does.
- Completing an IPO: The company is no longer private — §409A options must be granted at the market price going forward.
M&A and Transaction Events
- Signed letter of intent (LOI) for acquisition: A signed LOI — even one that hasn't closed — creates a known potential exit at a specific price. This is considered a material event because it represents concrete evidence of value that was not present at the last 409A date.
- Executed term sheet for acquisition: Even stronger evidence of value.
- Completed secondary transaction at significantly different price: If the company or shareholders complete a secondary at a price materially above or below the current 409A FMV, this may constitute a material event.
Company Performance Events
- Revenue milestone: Reaching a major revenue threshold (e.g., crossing $1M, $5M, $10M ARR) may constitute a material event if it was not anticipated in the last valuation
- Material revenue decline: A 40–50%+ decline in revenue — due to customer churn, market shift, or product failure — is a material negative event
- Loss of a major customer: If a single customer represents 30%+ of revenue and churns, this is a material event
- Signing a transformative customer contract: Landing a marquee enterprise contract that materially changes revenue projections
- FDA approval or rejection (HealthTech/BioTech): Regulatory approval or rejection events are always material
Strategic and Structural Events
- Major acquisition completed by the company: If you acquire another business, your cap table, financials, and enterprise value all change materially
- Significant change in business model: Pivoting from B2C to B2B, adding a hardware component to a software product, or exiting a major business line
- IPO filing (S-1 submission): Filing the S-1 creates a known IPO price range, making the existing 409A effectively obsolete
The Urgency Timeline
| Material Event | How Quickly to Act | Risk of Delay |
|---|---|---|
| Equity round closes | Engage appraiser within 1–5 days; complete within 30 days | High — cannot grant options until complete |
| LOI signed for acquisition | Pause grants immediately; consult appraiser within 1 week | Very high — LOI price anchors FMV |
| Major revenue event (positive) | Consult appraiser within 2 weeks to assess whether 409A is required | Medium — depends on materiality |
| Major revenue event (negative) | Consult appraiser within 2 weeks | Medium — lower FMV may benefit new grants |
| S-1 filed | Immediately — transition to public market pricing | Critical — SEC will scrutinise |
What Is Not a Material Event
To avoid unnecessary costs, it is also important to know what does not typically constitute a material event:
- Signing a term sheet for a funding round (only closing triggers it)
- Adding a new team member or executive (unless they bring a transformative customer or contract)
- Normal business growth within the range contemplated by the last valuation
- Reaching 12 months (this triggers expiry, not a material event — though the outcome is the same: you need a new 409A)
- Launching a new product feature (unless it represents a fundamental business model change)