409A Valuation: Price Your Stock Options Correctly
You can't just pick a number for your stock option exercise price. IRS Section 409A requires "fair market value" or your employees face tax penalties. Here's how to stay compliant.
What Is a 409A Valuation?
A formal appraisal of your company's fair market value, used to set the exercise price for stock options. Sets the "strike price" employees pay to buy shares.
When You Need One
- Before granting any stock options
- After material changes (funding, major deals, pivots)
- At least every 12 months
- Before any equity event (acquisition, IPO)
Why It Matters
If you set strike price too low: Employees owe taxes immediately on the "discount" plus 20% penalty tax.
How to Get a 409A
- Hire a valuation firm: $1,000-5,000 for early stage
- Use software platforms: Carta, Pulley offer integrated 409A
- DIY (risky): Not recommended except pre-revenue, pre-funding
What's Included
- Financial analysis
- Comparable company analysis
- Discount for lack of marketability
- Option pool impact
- Methodology documentation
Cost Factors
- Company stage (pre-seed cheaper than Series B)
- Revenue complexity
- Time since last funding
- Industry and comparable availability
Common Mistakes
- Granting options without 409A
- Using outdated valuations (12+ months)
- Not updating after funding rounds
- Setting arbitrary strike prices
We Help You Get Compliant
409A is straightforward when done right. We connect you with valuation providers and ensure your option grants are compliant.