An independent estimate of a private company's share value, required to set exercise prices for employee stock options. Helps companies comply with IRS tax rules. Typically updated annually or after significant events.
Why it matters
If you're a C-corp issuing stock options, a 409A valuation is legally required. Skipping it means your options could be repriced by the IRS, resulting in penalties for both the company and the employees who received them. It's one of those compliance steps that's easy to overlook early on but expensive to fix later.
How it works
You hire a qualified independent appraiser (or use a platform like Carta that includes it in their subscription). They analyze your company's financials, comparable transactions, and market conditions to arrive at a per-share value for your common stock. This becomes the minimum strike price for new option grants. You need to update the valuation annually or after a material event like a funding round. Cost ranges from $1,000 to $5,000 for early-stage companies, making it one of the more affordable compliance requirements.
Learn more
Related terms
Ready to get your equity right?
Equity Matrix tracks contributions and calculates ownership automatically.
Get Started Free