Definition of 409A valuation

Definition

A 409A valuation is an assessment private companies are required by the IRS to conduct regarding the value of any equity the company issues or offers to employees. A company wants the 409A to be low, so that employees make more off options, but not so low the IRS won’t consider it reasonable. In order to minimize the risk that a 409A valuation is manipulated to the benefit of the company, companies hire independent firms to perform 409A valuations, typically annually or after events like fundraising.

Related terms

More from The Holloway Guide to Equity Compensation

Taxes on Equity Compensation › 409A valuations

The 409A valuation of employee equity is usually much less than what investors pay for preferred stock; often, it might be only a third or less of the preferred stock price.

🌪controversy Although the 409A process is required and completely standard for startups, the practice is a strange mix of formality and complete guesswork. It has been called “quite precise—remarkably inaccurate,” by venture capitalist Bill Gurley. You can read more about its nuances and controversies.

  • 🚧incomplete More on when 409As happen.

    • A 409A does have to happen every 12 months to grant the company safe harbor.
    • A 409A has to be done after any event that could be deemed a “material event,” which is a fancy way of saying any event that could change the price or value of the company meaningfully. Other examples could be if a CEO leaves, if the company starts making a ton of money, or an acquisition.
  • technical “409A” is a reference to the section of the Internal Revenue Code that sets requirements for options to be tax-free on grant.

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The Holloway Guide to Equity Compensation
Joshua Levy, Joe Wallin, and over 35 contributors
Over 3 hours and 300 linked resources

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