An independent appraisal of a private company's fair market value, required before issuing stock options to set a legally compliant strike price.
A 409A valuation is an independent third-party appraisal of the fair market value of a private company's common stock. It's named after Section 409A of the IRS tax code. Before you can grant stock options to employees, you need a 409A valuation to legally set the strike price — the IRS requires that options be granted at or above fair market value.
If you grant options below fair market value (called "discounted options"), the recipient faces severe tax consequences: they owe income tax on the entire in-the-money amount immediately at vesting, plus a 20% penalty tax. This is why every company needs an independent 409A before making option grants.
409A valuations are typically performed by specialized firms and cost $2,000–$10,000 depending on company complexity. They're valid for 12 months or until a material event (like a fundraising round) occurs. Most companies get a new 409A after each financing round because the new valuation evidence requires a fresh appraisal. Services like Carta and Pulley include 409A valuations as part of their equity management offerings.