409A Valuation Explained: Requirements, Process, and Cost

Short answer: A 409A valuation is the IRS-required independent appraisal that sets the strike-price floor for employee stock options — it must be done by a qualified appraiser, refreshed annually or after any material event, and costs $499–$15,000 depending on stage and complexity.

A 409A valuation is an IRS-required independent appraisal of common stock fair market value, setting the strike-price floor for employee stock option grants under IRC Section 409A. In 2026 a typical 409A costs $499–$15,000, takes 2–14 business days, must be updated annually or after any material event (funding round, M&A, major revenue change), and confers IRS safe harbor protection when signed by a credentialed appraiser. The fastest way to see what a 409A produces for your company is to start a free draft report. Founders and CFOs often ask:

• What exactly is a 409A valuation?
• When is a 409A required?
• How does the 409A process work?
• How much does a 409A valuation cost?
• Why is my 409A lower than my fundraising valuation?

This guide answers all of those questions in one place, clearly and practically, so you can issue equity with confidence and remain IRS-compliant.

What Is a 409A Valuation?

A 409A valuation determines the fair market value (FMV) of a startup's common stock for U.S. tax purposes, under Section 409A of the Internal Revenue Code.

Its primary purpose is to ensure that:

• Employees are not granted stock options below fair market value
• Companies avoid hidden compensation and severe tax penalties
• Equity compensation is issued in a compliant, defensible way

For a deeper dive into the fundamentals, see our guide on What is a 409A Valuation?

When Is a 409A Valuation Required?

A 409A valuation is required before issuing equity compensation, including:

• Stock options
• RSUs (restricted stock units)
• Other equity-based awards

What Events Trigger a New 409A Valuation?

You need a new 409A valuation when any of these occur:

• You issue your first stock options
• You raise a priced funding round
• There is a material change in the business (revenue, growth, strategy)
• You are involved in M&A discussions
• 12 months have passed since the last 409A

If you want a deeper breakdown, see: When Do You Need a New 409A Valuation?

Is a 409A Required If You Raised on a SAFE?

Yes.

This is one of the most searched and most misunderstood questions.

A SAFE (Simple Agreement for Future Equity):

• Is not a valuation
• Does not establish fair market value
• Does not replace a 409A

Why Is a 409A Valuation Lower Than the Investor Valuation?

The 409A is lower because it values common stock, while investors price preferred shares that carry liquidation preferences, downside protection, and control rights — making preferred inherently more valuable than common.

• Investor valuation prices preferred shares, which include liquidation preferences, downside protection, and control rights
• 409A valuation prices common stock, which sits at the bottom of the capital stack

Because common stock carries more risk, its fair market value is typically lower.

Related reading: 409A Valuation vs Preferred Share Price: Why They're Different

How Does the 409A Valuation Process Work?

The process follows five defined steps regardless of provider or methodology. The quality of execution depends heavily on your choice of provider—see our guide on 409A valuation services and providers for what to look for.

Step 1: What Does the Company and Financial Review Cover?

The appraiser reviews your core business data to build the foundation of the analysis:

• Financial statements
• Cap table
• Business model
• Revenue and growth metrics
• Funding history

Step 2: How Is the Capital Structure Analyzed?

The appraiser maps preferred shares, liquidation preferences, SAFEs, and options to understand exactly how value flows through the capital stack to common stockholders.

Step 3: Which Valuation Methodology Is Selected?

The methodology depends on the company's stage, funding history, and exit visibility. Common methods include:

• Option Pricing Model (OPM)
• Probability-Weighted Expected Return Method (PWERM)
• Hybrid approaches

The appropriate model depends on the company's stage, funding history, and exit visibility.

Step 4: How Is Fair Market Value Determined?

The appraiser produces a defensible per-share FMV for common stock, backed by a documented analysis covering methodology selection, inputs, calculations, and conclusions.

Step 5: What Is Safe Harbor Protection?

A compliant 409A provides safe harbor protection — the IRS will generally accept the valuation unless proven grossly unreasonable. This is the primary compliance benefit of using a qualified, independent appraiser.

How Much Does a 409A Valuation Cost?

What Are Typical 409A Cost Ranges by Stage?

• Early-stage startups: $1,000 – $3,000
• Growth-stage startups: $3,000 – $7,000+
• Complex or late-stage companies: higher

Pricing depends on:

• Company stage
• Complexity of the cap table
• Number of financing rounds
• Valuation methodology required

See our pricing page for our competitive rates. For a deeper look at how AI is reducing 409A costs, see Affordable 409A Valuations.

Why Shouldn't Cost Be the Only Factor in Choosing a Provider?

A cheap or rushed 409A puts safe harbor at risk — and the downstream cost of non-compliance far exceeds any upfront savings. Specifically, a low-quality 409A can:

• Put safe harbor protection at risk
• Lead to incorrect option pricing
• Create issues during audits, fundraising, or acquisitions

How Often Does a 409A Need to Be Updated?

A 409A must be refreshed every 12 months at minimum — or sooner if a material event occurs first. The valuation is valid for whichever comes first:

• 12 months, or
• Until a material event occurs (fundraising, acquisition talks, major financial changes)

Failing to update a 409A when required can invalidate safe harbor protection.

What Happens If You Don't Get a 409A Valuation?

Skipping a required 409A exposes founders and employees to immediate, serious tax consequences. Potential consequences include:

• Immediate taxation of option gains
• Additional IRS penalties
• Interest charges
• Employee dissatisfaction and legal exposure

Who Needs a 409A Valuation?

Any private company granting equity compensation under U.S. tax rules needs a 409A. That includes:

• U.S. startups
• International startups issuing equity to U.S. taxpayers
• Companies with U.S. parent entities
• Any private company granting equity compensation under U.S. tax rules

What Are the Key Takeaways on 409A Valuations?

Is Getting a 409A Worth It?

Yes — and a well-run 409A doesn't have to be confusing, slow, or expensive. When done correctly, a compliant 409A:

• Protect your company
• Protect your employees
• Support healthy growth and fundraising

If you're planning to issue equity or already have, understanding the requirements, process, and cost of a 409A valuation is essential.