409A Valuations: A Visual Guide for Founders
Written by Harry Prabandham
Curated by Rubric Financial
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What a 409A Valuation Is and Why Startups Need One
- A 409A valuation is an independent appraisal of a private company's common stock fair market value, required under IRS Section 409A for setting stock option exercise prices.
- If you issue stock options with a strike price below fair market value, employees face immediate tax liability on the discount and a 20% penalty tax under Section 409A.
- Having a valid 409A valuation provides a safe harbor that protects both the company and employees from IRS penalties related to option pricing.
- Every startup that grants stock options or other equity compensation must obtain a 409A valuation before issuing those grants.
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About the author
Harry PrabandhamFounder & CEO
Founder and CEO of StartupCFO. MBA from Wharton, MS in Computer Science, and decades of experience building and advising venture-backed startups.
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Independent valuation of common stock used to set option strike prices.
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