409A valuation: when startups need one and how it works

When do I need a 409A?

• At formation: no. Founders buy restricted stock at a price the board sets in good faith, usually par value (for example, $0.00001 per share).
• Before your first option grant: yes. Options have to be priced at fair market value, and a 409A is the standard way to set it.
• Every 12 months: the safe harbor lasts 12 months from the valuation date.
• After a material event: a priced financing, a significant change in the business, or an acquisition offer can make an existing 409A stale before the 12 months are up. Ordinary option grants don’t count as material events.

Does a SAFE round trigger a new 409A?

Not automatically. A SAFE isn’t a priced round, so it doesn’t set a new value for common stock by itself. But money raised on SAFEs is something the appraiser has to consider. Once you’ve raised a meaningful amount, get a 409A before you grant options rather than relying on the price you used at formation. Ask your appraiser whether a SAFE closing requires a refresh.

Can I grant equity before I have a 409A?

Restricted stock, yes. It can be sold to founders and early team members at the board’s good-faith fair market value. Before any money is raised, that’s usually par value.

Options, not safely. An option priced below fair market value on its grant date can trigger serious tax consequences for the holder (see below). The classic mistake is granting options at the formation price after the company has raised money.

What’s the right order of operations?

• First, clean up the cap table so the appraiser has accurate data.
• Second, get the 409A.
• Third, have the board approve the grants at the 409A price, with the valuation referenced in the consent.

Don’t approve grants first and try to price them later.

What does the appraiser need from us?

Your cap table, certificate of incorporation, financing documents (including SAFEs), historical financials, a forecast for the next 12 to 24 months, and any term sheets or acquisition discussions in progress.

Who does 409A valuations, and what do they cost?

There are many 409A valuation firms. Many of our clients find that using Carta is easiest if they already manage their cap table there. For an early-stage company with a simple cap table, a standalone 409A typically costs about $1,500 to $3,500 and takes one to three weeks once the appraiser has your information. Some cap table platforms include 409As in their subscription.

What does the board do?

Management engages the appraiser. The board reviews the valuation and adopts it as fair market value when it approves option grants.

Why is my 409A so much lower than what investors paid?

Investors buy preferred stock, which has a liquidation preference and other rights that common stock doesn’t. A 409A values common stock, which ranks behind preferred and can’t easily be sold, so the 409A value per share is normally well below the preferred price. That’s expected, and it’s what makes option grants attractive to employees. See How to Value Startup Stock.

What happens if options are granted below fair market value?

The option can be treated as deferred compensation under Section 409A. The holder may owe income tax as the options vest, plus an additional 20% tax and interest, and the company can have withholding and reporting problems. Talk to a tax advisor if you think a grant was underpriced.

See our Stock Option Grant and Cap Table Cleanup services.