409A Valuation vs. 409A Strike Price: A Complete Guide for Startups

Learn the difference between 409A valuation and 409A strike price, how they affect stock options, and how to stay IRS-compliant. This in-depth guide is essential for startup founders, CFOs, and HR teams.

🔍 What Is a 409A Valuation?

A 409A valuation is a third-party appraisal that determines the Fair Market Value (FMV) of a private company’s common stock. It’s required under Internal Revenue Code Section 409A and serves as the legal basis for pricing employee stock options.

📌 Purpose of a 409A Valuation:

• Establishes a baseline fair market value for common stock.
• Ensures stock options are not granted below FMV.
• Provides IRS Safe Harbor to protect against audits and penalties.
• Allows the company to issue stock options tax-free until exercised.

🗓️ When Is a 409A Valuation Required?

• Every 12 months
• After a funding event (e.g., Seed, Series A, B, etc.)
• Following major company changes (e.g., M&A, product launches, C-suite hires)
• Before granting stock options to employees or advisors

💸 What Is a 409A Strike Price?

The 409A strike price, also known as the exercise price, is the amount employees must pay to buy each share of stock under their option grant. It is typically equal to the FMV from the most recent 409A valuation.

⚖️ IRS Requirements:

• Must be at or above FMV on the date of the option grant.
• If set below FMV, options may be treated as deferred compensation under Section 409A—triggering immediate income tax, a 20% penalty, and interest charges.

📊 Key Differences Between 409A Valuation and Strike Price

🔬 How Is a 409A Valuation Performed?

409A valuations must follow IRS and AICPA standards. A qualified appraiser typically uses one or more of the following methods:

1. Income Approach (Discounted Cash Flow – DCF)

• Projects future cash flows
• Discounts them to present value
• Suitable for early-stage and high-growth startups

2. Market Approach

• Compares your company to similar public/private companies
• Adjusts based on metrics like revenue, EBITDA, or users
• Useful when market comparables exist

3. Asset-Based Approach

• Values assets and liabilities directly
• Ideal for companies with tangible or intellectual property assets

🛠️ How Is the 409A Strike Price Set?

The strike price is set by the company’s Board of Directors (or Compensation Committee) using the latest 409A valuation FMV. It is locked in on the date of grant and doesn’t change for the life of the option.

Factors That Influence the Strike Price:

• Most recent 409A valuation
• Board approval
• Market conditions at grant
• Recent changes in funding, revenue, or business model

🚨 Risks of Setting Strike Price Below FMV

Granting options below FMV violates IRS Section 409A. Consequences include:

• Immediate income recognition for employees
• 20% additional federal tax
• Accrued interest
• Company liability and audit exposure

💡 Best Practice: Always obtain a Safe Harbor 409A valuation from a certified third-party to mitigate these risks.

🔁 When to Update Your 409A Valuation

👨‍💼 How to Choose a 409A Valuation Provider

Look for firms that are:

• Independent and credentialed
• Audit-defensible
• Familiar with startup equity and fundraising
• Aligned with IRS Safe Harbor guidelines

Credentials to Look For:

• ABV® (Accredited in Business Valuation)
• ASA (Accredited Senior Appraiser)
• CVA (Certified Valuation Analyst)

Quality Firms Offer:

• Fast turnaround (2–5 business days)
• Transparent methodology
• Benchmarking to similar companies
• Detailed audit-ready documentation

💬 Real-World Example: Why 409A Accuracy Matters

Startup: A seed-stage SaaS company raised $3M.
409A Valuation: $0.75/share.
409A Strike Price: Set at $0.75/share.
Result: At Series A exit, shares were worth $5.00. Employees exercised options tax-free and earned substantial equity upside—fully IRS compliant.

🧾 Summary Table

✅ Conclusion: Get 409A Right to Protect Your Startup

Accurate and compliant 409A valuations and strike prices are critical for:

• IRS compliance
• Employee motivation
• Long-term equity strategy
• Avoiding penalties and audits

💼 Need a Trusted 409A Valuation Firm?

Transaction Capital LLC offers:

• IRS-compliant 409A valuations
• Certified analysts (ABV®, ASA, CVA)
• Starting at just $500
• 2–5 day delivery
• Fully audit-defensible documentation

📞 Start Your 409A Valuation Today

• Phone ‎+1 (917) 809-4838
• Email: info@txncapitalllc.com
• Website: txncapitalllc.com
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