A 409A valuation is the IRS's required answer to a simple question: what is your common stock actually worth?
Every startup that wants to issue employee stock options needs one. Without it, you can't set a legally defensible strike price — and your employees could face a 20%+ tax penalty on unvested options they can't even sell yet. I've seen this blindside founders who thought they could delay the paperwork until their "real" raise. That's a mistake.
The good news: 409As are well-understood, relatively inexpensive at early stages, and straightforward to get right. Here's exactly what they are, when you need one, and what it actually costs.
What Is a 409A Valuation?
Section 409A of the Internal Revenue Code governs nonqualified deferred compensation — which includes stock options. The rule is simple: options must be granted at or above the fair market value (FMV) of the underlying stock on the grant date. If they're not, the IRS treats the entire option spread as taxable income at grant, not at exercise or sale.
To prove your options are granted at FMV, you need a "qualified independent appraisal" — the 409A. This is a formal written appraisal by a credentialed third party using IRS-approved methods. It gives you "safe harbor" protection: as long as you grant at or above the 409A price, you're protected from IRS challenge unless there's clear evidence of fraud or gross error.
Without 409A
Options taxed as ordinary income at grant date on the full spread — employees owe taxes on money they can't access
With 409A Safe Harbor
Strike price = FMV, no tax event at grant — employees pay taxes only when they exercise and sell
409A Penalty (employee)
20% excise tax + income tax + interest on the entire deferred compensation amount
409A Penalty (company)
W-2 reporting obligations, potential withholding liability, legal exposure from disgruntled employees
How 409A Valuations Are Calculated
The appraiser uses one or more of three primary methodologies to arrive at common stock FMV. The choice depends on stage and data availability:
Most common for venture-backed companies. Uses the most recent priced round as an anchor, then works backward through an option pricing model (Black-Scholes or lattice) to derive common stock value from preferred stock terms. A $10M seed at 2x liquidation preference on $1M raised implies a very different common FMV than a clean 1x non-participating preferred.
Models multiple exit scenarios (IPO, M&A, wind-down) with assigned probabilities and time horizons. More complex and expensive, but required by auditors for companies approaching a public offering or with complex capital structures.
Values the company using public market multiples (EV/Revenue, EV/EBITDA) applied to the startup's metrics, then applies a discount for illiquidity and lack of marketability (DLOM), typically 30–50% at early stages.
The resulting common stock FMV is almost always a fraction of the preferred stock price paid by investors — often 10–30% at early stages, rising toward parity as the company de-risks and approaches liquidity.
409A Valuation Cost by Stage
Cost scales with complexity. Here's what you should expect to pay in 2026:
| Stage | Typical Cost | Turnaround | Best Providers |
|---|---|---|---|
| Pre-Seed / Pre-Revenue | $1,500–$3,000 | 1–2 weeks | Carta, Pulley, Capshare |
| Seed | $2,000–$4,000 | 1–2 weeks | Carta, Pulley, AngelList |
| Series A | $3,000–$6,000 | 2–3 weeks | Carta, CBIZ, Andersen |
| Series B | $5,000–$10,000 | 2–4 weeks | CBIZ, Aon, Duff & Phelps |
| Series C+ / Pre-IPO | $10,000–$25,000+ | 3–6 weeks | Big 4 affiliates, Duff & Phelps, Houlihan Lokey |
Carta and Pulley bundle 409As into their cap table subscription for significantly lower cost — often $1,500–$2,500 for seed-stage companies already using their platform.
When Do You Need a 409A Valuation?
You need a fresh 409A before any of these events:
Before issuing your first employee stock options
This is the most common trigger. You cannot grant a single option without a current 409A.
After closing a priced equity round (seed, Series A, B…)
A new round changes your cap structure and implied valuation — the old 409A is no longer valid.
Every 12 months
Even without a material event, 409As expire. Missing the renewal window means all grants during the lapse period are at risk.
After a significant change in business condition
Major revenue milestones, a lost enterprise contract, or a new large customer can each constitute a material event requiring re-appraisal.
Before an M&A transaction or IPO filing
Acquirers and underwriters will scrutinize your 409A history. Gaps or aggressive FMVs can create liability in diligence.
Common 409A Mistakes Founders Make
I've seen all of these in portfolio companies. The mistakes are predictable and avoidable:
✕ Delaying the 409A to save money
Backdating options retroactively to before the 409A is done is not safe harbor — it exposes every employee who received options during the gap.
✕ Using the preferred price as the strike price
Preferred has liquidation preferences and other rights that make it worth more than common. Using preferred price = options priced too high, destroying option value. Or too low = IRS problem.
✕ Not refreshing after a new priced round
If you raised a seed in January and a Series A in September, any options granted September–January of next year are invalid unless you got a new 409A after the A.
✕ Using a suspiciously low FMV to make options look better
An FMV that is implausibly low relative to your latest round will not survive IRS scrutiny — especially in an acquisition where both parties have incentive to price options favorably.
How the 409A Relates to Employee Option Pricing
The 409A sets your strike price floor. Your employees will exercise options at this price, then pay capital gains tax on the difference between the strike and their sale price. The lower the FMV at grant relative to the eventual exit, the more upside employees capture.
This is why 409A FMVs are heavily discounted versus preferred prices, particularly at early stage. A seed round at a $10M post-money with standard 1x non-participating preferred might yield a 409A common FMV of $1.50–$3.00/share while preferred was priced at $10/share — the discount reflects the liquidation stack, lack of marketability, and uncertainty.
Track how your 409A FMV evolves over time relative to your preferred price at Value Add VC's Benchmarking Dashboard. As you de-risk the company and approach liquidity, the discount narrows — typically to 70–90% of preferred price in the Series C+ range.
Choosing a 409A Provider
For most early-stage founders, the decision is simple: use whoever handles your cap table. Carta and Pulley both offer bundled 409As at significant discounts for existing customers, and their turnaround times are fast (often 5–10 business days). The quality is sufficient for seed and Series A audit purposes.
As you approach Series B and beyond — especially if you're on a Big 4 audit path (required for public companies and many large enterprise customers) — you should migrate to a firm whose name carries more weight in diligence: CBIZ, Andersen, Aon, or Duff & Phelps. The difference in cost ($3,000–$8,000 more) is trivial relative to the deal size.
Carta, Pulley, Capshare, AngelList
Pre-seed through Series A — fast, inexpensive, defensible for most purposes
CBIZ, Andersen, Scalar
Series A through Series C — stronger audit trail for Big 4 audits
Aon, Duff & Phelps, Houlihan Lokey, FTI Consulting
Series C through IPO — highest defensibility, full PWERM modeling
The 409A is not optional bureaucracy.
It's the legal foundation that lets you compensate employees with equity without creating an immediate, non-discretionary tax event. Get it before your first option grant, refresh it after every priced round, and budget $2,000–$5,000/year for it at early stage. It's one of the lowest-cost, highest-stakes compliance requirements a startup has.
Model your equity dilution and option pool over time with Value Add VC's Benchmarking Dashboard. Originally published in the Trace Cohen newsletter.