---
title: "What Is 409A Valuation?"
term: "409A Valuation"
description: "A 409A valuation is an independent appraisal of a private company's common stock fair market value, required for setting strike prices on stock options under U.S. tax rules."
date: 2026-07-25T00:00:00.000Z
updated: 2026-07-25T00:00:00.000Z
topics: ["equity", "regulation"]
source: https://venturecapitaltracker.com/glossary/409a
---

# What Is 409A Valuation?

> A 409A valuation is an independent appraisal of a private company's common stock fair market value, required for setting strike prices on stock options under U.S. tax rules.

A **409A valuation** is the formal fair market value assessment of a private company's common stock, used to set legal strike prices on employee stock options.

## How it works

After a financing round, preferred stock often prices higher than common because preferred carries liquidation preferences and other rights. A 409A provider—typically a qualified firm—applies discounts for lack of marketability and other factors to derive a common-stock price below the preferred round price. The board adopts that value; new option grants use it as the exercise price.

Companies refresh 409As after material events: new funding, major revenue shifts, acquisitions, or roughly every twelve months. Carta, Pulley, and specialized valuation shops produce the report; the board minutes record approval. The process is slower than updating a cap table but cheaper than fixing tax problems later.

## Why it matters

- **Founders:** You cannot responsibly grant options without a current 409A. Promising "we'll fix the price later" exposes hires to IRS risk.
- **Operators:** HR and finance need the approved strike price before offer letters go out. Mismatch between board approval and grant dates creates compliance gaps.
- **Investors:** Clean 409A history speeds diligence. Messy or stale valuations signal sloppy governance.

## Common mistake

Using the last preferred round price as the option strike price. Common stock is almost never worth the same as preferred; skipping a proper 409A can trigger penalties for employees even when everyone acted in good faith.

## Related ideas

Stock option grants, [83(b) election](/glossary/83b-election), fair market value, and board approval of equity compensation.

## FAQ

### What is a 409A valuation in simple terms?

It is a third-party report that says what one share of common stock is worth today. Companies use that number as the exercise price for new option grants so employees are not receiving discounted stock that the IRS treats as taxable income immediately.

### Why does a 409A valuation matter?

Without a defensible 409A, option holders risk extra taxes and penalties under Section 409A of the Internal Revenue Code. Boards also rely on it to show they priced equity grants responsibly during audits or future financings.


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Source: https://venturecapitaltracker.com/glossary/409a