409A valuation
Also: 409A, 409A valuation, Section 409A valuation, 409A appraisal
An independent third-party appraisal of a private company's common stock used to set option strike prices at fair market value, providing a safe harbor against Section 409A penalties.
A 409A valuation is an appraisal performed by a qualified independent party, typically a valuation firm, to establish the common stock FMV of a private company. Options granted at a strike equal to or above the 409A FMV meet the safe harbor against Section 409A deferred compensation penalties. Valuations are refreshed at least annually or after a material event such as a new financing round, a major customer loss, or a secondary transaction.
Example: a Series C company closes a new round and triggers a 409A refresh. The new appraisal raises common FMV from $8.40 to $14.10. Options granted after the refresh carry the $14.10 strike. Employees who received grants during the old window retain $8.40 strikes, which produces meaningful value if the company continues to grow.
Common mistake: treating 409A as a market price. It is a tax compliance artifact that incorporates illiquidity discounts and preferred-to-common adjustments. The secondary market price, tender offer price, and acquisition price typically sit well above the 409A.
409A matters at each grant date and at each exercise, because the spread between FMV and strike is what drives NSO ordinary income and ISO AMT.