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How to prepare for a 409A valuation

  • 1.  How to prepare for a 409A valuation

    Posted 04-25-2023 11:52

    What questions do you have about valuations? Please share in the comments.

    A 409A valuation is an independent appraisal of the fair market value (FMV) of a private company's common stock (the underlying security reserved mainly for founders and employees) on the date of issuance. This valuation is based on guidance and standards established in section 409A of the IRS's internal revenue code.

    Long story short: in order to offer or issue equity to service providers, understanding the fair market value is crucial unless you want to risk severe IRS penalties for the company and equity holders. So if you want to offer equity, an independent 409A valuation can be helpful.

    When do I need a 409A valuation?

    • Before you issue your first common stock options
    • After raising a round of venture financing
    • Once every 12 months (or after a material event)
    • If you're approaching an IPO, merger, or acquisition

    Material event: 
    For an early stage company, the most common material event is a priced equity financing. Secondaries, letters of intent (mergers/acquisitions), significant revisions of forecasts, pivots, unusually high volatility in the public market, or anything else that could feasibly affect the share price could also qualify. Generally, whether an event is material should be discussed by the company and their legal counsel.

    Learn more about 409A valuations in our Carta Blog here:

    Check out this checklist on how you can prepare for an upcoming 409A Valuation here:

    Brent Devey
    Community Manager