FAQ: Does Your Business Need a 409A Valuation?

Yes—if your company is issuing stock options or other equity-based compensation, a 409A valuation is legally required. This applies to private companies that want to set a “fair market value” for their common stock and avoid IRS penalties for underpricing options.

Why This Question Matters

409A valuations aren't just a formality—they're a compliance requirement under IRS rules. If your business grants stock options without a defensible, independent 409A valuation, your employees may face severe tax consequences, including early income tax, interest, and penalties.

A proper 409A protects both the company and the employees by ensuring equity compensation is issued at fair market value, as required by IRS Section 409A.

Related Questions Clients Often Ask

• What triggers the need for a 409A valuation?

• How often do I need to update it?

• Can I use a business valuation instead of a 409A?

• What happens if I skip the 409A?

• Who should perform a 409A valuation?

When Do You Need a 409A Valuation?

You’ll need a 409A valuation before issuing stock options or other equity compensation if your business is a:

• Private C corporation or LLC taxed as a corporation

• Start-up planning to raise venture capital

• Growth-stage business offering equity to employees, advisors, or contractors

You must also update your 409A valuation:

• At least every 12 months, or

• Any time there's a material event, such as a funding round, major acquisition, change in capital structure, or a significant shift in financial performance

Tips for Navigating the 409A Process

✅ Hire a Qualified Valuation Provider

Look for firms that specialize in startup or private company 409A valuations. While not legally required to use an independent third party, doing so provides a safe harbor defense if challenged by the IRS.

✅ Don’t DIY

Internal estimates or generic valuation calculators do not meet IRS requirements. A professional 409A includes financial modeling, peer comparisons, and appropriate discounts for lack of marketability.

✅ Keep Your Cap Table Updated

Valuation providers need accurate share class information and any recent changes in equity structure.

✅ Document Everything

Maintain full records of your 409A report, engagement terms, financial statements, and board approval in case of audit or future due diligence.

Final Thoughts

If you’re planning to offer equity-based compensation, a 409A valuation isn’t optional—it’s essential. It ensures IRS compliance, protects your team from unintended tax consequences, and gives investors and employees confidence in your process.

To learn more about 409A valuations, visit our Business Valuation page. If you'd like to get started, book a Discovery Call today.