What is a 409a Valuation?

What is a 409A Valuation?

A 409A valuation is a snapshot of what your company is worth, but not in the way most people think. It’s not the number you brag about to VCs or splash across TechCrunch headlines. It’s an IRS-approved, independent estimate of your company’s fair market value (FMV), specifically used to set the strike price for stock options. If you’re giving equity to employees or advisors, you’ll need one.

When Do You Need a 409A?

If you’re offering equity, you’ll need a 409A before you issue your first options. It's also required after any major event that impacts your valuation—think funding rounds, acquisitions, or even significant customer wins. Why? To protect everyone involved from hefty tax penalties down the line. Done right, a 409A valuation gives your company “safe harbor” status with the IRS, which means the IRS assumes your numbers are reasonable unless they can prove otherwise.

What Triggers a New 409A?

1. Issuing Stock Options: You’re hiring or rewarding someone with equity—time for a 409A.
2. Major Events: Raised a round? Sold to a strategic acquirer? Landed your first seven-figure customer? All of these can shift your valuation and require a refresh.
3. The Clock: A 409A expires after 12 months. Even without a material event, you’ll need an updated valuation annually.

What Happens Without One?

Skipping or lowballing your 409A valuation isn’t just risky—it’s expensive. If the IRS audits and decides your equity wasn’t priced correctly, they’ll hit employees with immediate taxes, interest, and a 20% penalty on all deferred compensation. It’s a mess.

How is a 409A Calculated?

There are three main ways valuation providers calculate FMV, depending on where your company is in its lifecycle:

1. Market Approach: For funded startups, they’ll typically use the “backsolve” method. This means reverse-engineering your valuation based on what investors just paid for preferred stock and adjusting for common stock.
2. Income Approach: If your company has meaningful revenue, this method projects future cash flows and discounts them for risk.
3. Asset Approach: Early-stage, pre-revenue startups often default to this. It’s based on the value of your tangible and intangible assets.

What Do I Need to Get a 409A Valuation?

Getting a 409A valuation isn’t just about finding a provider—it’s about preparing the right information to give them a complete picture of your company. The more organized you are, the smoother the process will go. Here’s what you’ll typically need to gather:

1. Company Details
   • Your company’s name, industry, and key details like the CEO’s name and your legal counsel.
   • A copy of your amended and restated articles of incorporation.
2. Industry Information
   • A description of your industry and market position.
   • A list of comparable public companies that are relevant benchmarks for your business.
3. Fundraising and Equity Data
   • Details about your most recent funding round, including the type of equity sold (e.g., preferred shares, convertible notes).
   • A timeline for any expected liquidity events, such as an IPO or acquisition.
   • Your current cap table, showing all equity holders and their ownership percentages.
4. Financial Information
   • Historical financial statements (balance sheets, income statements, and cash flow statements).
   • Forecasted revenue and EBITDA for the next 12–24 months.
   • Information about cash burn and runway.
   • The value of any non-convertible debt.
5. Material Events
   • A summary of any significant events since your last 409A valuation, such as customer wins, partnerships, acquisitions, or regulatory changes.
   • If this is your first 409A valuation, include a complete history of relevant events that have shaped your company’s growth.
6. Other Supporting Documents
   • A business plan, executive summary, or pitch deck that provides an overview of your strategy and goals.
   • Information about any external audit firms you work with, if applicable.

Why Does This Matter?
Your 409A valuation provider relies on this data to build a comprehensive understanding of your business. Think of it like giving a mechanic the tools they need to fix your car—better inputs mean better results. Missing or incomplete information can delay the process and even result in a valuation that doesn’t qualify for safe harbor.

Pro Tip: Start organizing this data before reaching out to a valuation provider. It not only speeds things up but also signals to the provider that you’re serious about compliance and accuracy. Some platforms, like Carta, will outline specific document requirements to streamline the process even further.

By assembling this information ahead of time, you’ll set your company up for a seamless and accurate valuation, minimizing hassle and ensuring compliance with IRS regulations.

409A Valuation vs. Post-Money Valuation

Here’s where people get confused: your 409A valuation is not your post-money valuation. Post-money is what investors are willing to pay for preferred shares—it’s a high-water mark. A 409A valuation is an IRS-approved number for what a single share of common stock is worth today. The two are related but serve very different purposes.

How Much Does it Cost?

A 409A valuation typically costs $1,000 to $10,000, depending on your company’s complexity. Some platforms bundle 409A valuations with other services like cap table management.

The Bottom Line

If you’re building a startup and issuing equity, don’t wing this. Hire a reputable 409A provider, get your valuation done correctly, and stay compliant. It’s not just about ticking a regulatory box—it’s about protecting your team and your company’s future.

How Fondo Can Help

If you need help putting together the information you need for your 409a valuation, such as Financial Statements or Financial Projections, Fondo would love to help. We help 1,000+ startups with their bookkeeping, taxes, and tax credits so they are prepared for moments like this when you need accurate financial information about your startup. Sign up or book a time with one of our experts here.