What Is a 409A Valuation?
A 409A valuation is an independent appraisal of the fair market value of a private company's common stock, used to set the exercise price of stock options.
How it works
The name comes from Section 409A of the US tax code. When a private company grants stock options, the exercise price is typically set at no less than the fair market value of its common stock. Because there is no public market price, the company commonly obtains an independent valuation to support that number. This explanation is conceptual, not tax advice.
Providers look at financials, recent funding, comparable companies and the rights attached to each class of stock. Common stock is usually valued below the preferred stock investors buy, since preferred carries extra protections.
Example
For example, investors buy preferred shares at $1.00 each. An independent 409A valuation might conclude that common stock is worth a lower figure, such as $0.30 per share. Options granted afterward could then carry a $0.30 exercise price. The numbers here are hypothetical. Real results depend on the company's facts.
Why founders care
Setting a strike price too low can create tax problems for the option holder, so many companies get a valuation before granting options and refresh it periodically, such as after a funding round or a major business change. Cost and timing vary by provider. Confirm the rules and safe-harbor details with an accountant or tax attorney before you grant options.
Common mistakes
- Granting options before getting a valuation.
- Using an old valuation after a big funding round or revenue jump.
- Treating the 409A price as the price investors paid.
- Skipping tax advice on the grants.
Frequently asked questions
Do all startups need a 409A valuation?
Companies that grant stock options typically get one, but whether yours needs one and how often is a question for your accountant or tax attorney. It is not needed if you issue no options.
Why is the 409A price lower than the investor price?
Investors buy preferred stock with extra rights, such as liquidation preference. Common stock, which employees receive, lacks those rights, so an independent appraiser usually values it lower.
Related terms
Go deeper
- How to Split Equity Between Co-Founders (and Vesting) GuideHow to split equity between co-founders: factors to weigh, equal vs unequal splits, 4-year vesting with a 1-year cliff, and a worked example with round numbers.
- How to Value a Startup: Methods for Pre-Revenue Companies GuideHow to value a startup before it has revenue: common methods, pre-money vs post-money, and a worked dilution example with round numbers you can follow.
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General information, not legal, tax or financial advice. Reviewed 11 November 2026.