What is a 409A valuation?

The 409A valuation (also called fair market value, or simply the 409A) is the valuation of one private company common share for tax purposes.

When paying taxes on your equity compensation, the amount you owe is based on the 409A.

The 409A is re-evaluated at least every year, and additionally whenever something big (like a new investment round) happens. Generally speaking, as your company grows more successful, the 409A increases.

If you have stock options and want to get the full picture of how they work, read our Stock Option Starter Guide.

How do I know the current 409A valuation?

Ask your employer for the current 409A.

How is the 409A valuation determined?

The 409A is determined by an independent valuation provider.

Every company that offers equity to their employees is required by law to get a 409A valuation. Re-valuations are required at least yearly, or whenever there is a material event (such as a new investment round) that may impact the company’s valuation.

Generally speaking, as your company grows more successful, the 409A increases.

The independent valuator determines the 409A using one of several approaches. They may analyze comparable private and public companies, analyze the company’s free cash flow or take the company’s tangible and intangible assets as the basis for their valuation.

How do I know when the 409A will change?

An upcoming 409A change is important to know because it influences your upfront costs of exercising stock options: if it increases, your upfront costs increase with it.

It’s a good idea to ask your company when they expect a re-evaluation so that you can plan for your exercise. Note, however, that they can never be 100% sure: a material event may happen unexpectedly.

Why is the 409a value relevant to startup employees?

The 409A valuation impacts employees in two ways.

It determines your strike price. Companies almost always set the strike price for new option grants equal to the current 409A. They cannot issue options with a lower strike price.
It impacts your tax bill. When exercising your options, you are taxed on the difference between their strike price and the current 409A.

For example, let’s say you’re granted options with a strike price of $1 when the 409A is also $1. If you immediately exercise (assuming your company allows early exercising), you wouldn’t need to pay taxes, as the difference is $0.

If on the other hand you exercise after the 409A is set to $3 at some point in the future, then per option you exercise, you pay tax over the $2 difference.

Why is it called a 409A valuation?

The 409A name comes from IRS Section 409A. This section in the United States tax code addresses how Americans are taxed on deferred compensation such as stock options and equity grants.

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Secfi Advisory Limited and Secfi Limited (each, an "Adviser" and collectively, the “Advisers”), are wholly owned subsidiaries of Secfi, Inc. ("Secfi"), and are regulated by the Securities and Exchange Commission as exempt reporting advisers, providing non-discretionary investment advice to private funds. Specifically, each Adviser serves as a non-discretionary sub-adviser to certain pooled investment vehicles (each, a "Fund") managed by a third-party manager (the "Fund Manager"). Each Fund has been or will be formed by the Fund Manager for various purposes, including but not limited to, acquiring exposure to the stock ("Shares") of late-stage and growth-stage private technology companies ("Companies") held by the employees of such Companies who are seeking liquidity ("Shareholders"). The Advisers provide investment management services to the Funds on a non-discretionary basis solely with respect to the recommendation of certain Private Financing Contracts in order to facilitate each Fund’s desired exposure to the relevant Companies. Such advisory services performed by each Adviser are limited exclusively to recommending, arranging and negotiating Private Financing Contracts on behalf of each Fund. The Advisers do not have discretion to make investments on behalf of a Fund save for recommending Private Financing Contracts consistent with the general strategy and investment guidelines of a particular Fund. Accordingly, the Funds are the Advisers’ clients; Shareholders are not customers or clients of the Advisers. The Advisers do not provide any type of investment, securities, tax, or brokerage advice or services to the Shareholders in any capacity.

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