As a startup or established company issuing stock options or other forms of equity compensation, securing a 409A valuation is essential for compliance with Section 409A of the Internal Revenue Code (IRC). This valuation determines the fair market value (FMV) of your company’s common stock, which is crucial for avoiding significant tax penalties and ensuring that your stock options are priced in accordance with IRS regulations.

The right 409A valuation provider can help you navigate the complexities of equity compensation, but with the growing number of firms offering valuation services, it’s important to choose the right partner. This guide will help you understand what to look for in a firm and the key factors that should influence your decision.

Key Factors to Consider When Choosing a 409A Valuation Firm

1. Certified Experts: The valuation firm you select should have professionals with recognized certifications such as ASA (Accredited Senior Appraiser) or ABV (Accredited in Business Valuation). These certifications ensure that the firm has the expertise to deliver precise and defensible valuations, which are essential if your valuation is ever audited by the IRS.
2. IRS Compliance: A reliable 409A valuation firm should follow established valuation guidelines and standards, including USPAP (Uniform Standards of Professional Appraisal Practice), SSVS (Statement on Standards for Valuation Services), and NACVA (National Association of Certified Valuators and Analysts). Adherence to these standards guarantees that your valuation meets regulatory requirements.
3. Tailored Services for Startups: Startups often have unique capital structures and rapid growth trajectories, requiring specialized valuation approaches. Your firm should understand the startup ecosystem and be able to offer flexible, customized solutions to address your company’s specific needs.
4. Affordability: The cost of 409A valuations has become more competitive, and it’s now possible to find high-quality, audit-ready valuations at an affordable price. Look for a firm that can offer the right balance between cost and value without compromising the quality of their services.

Is it Acceptable for a Company’s 409A Valuation to be Set by its Board if the Board Contains Experienced VCs?

According to Section 409A, a qualified appraiser must either (a) hold an appraisal designation from a recognized professional organization or (b) possess “significant knowledge, experience, education, and training” in valuation or a related field, typically requiring at least five years of relevant experience.

While experienced venture capitalists (VCs) on your company’s board may qualify under this definition, many VCs are reluctant to take on the responsibility of preparing a 409A valuation report. This is because producing a compliant valuation report involves significant risk, especially if the valuation is challenged by the IRS.

For these reasons, most companies choose to engage independent, third-party appraisers for their 409A valuations. This approach mitigates conflicts of interest, ensures credibility, and provides the documentation necessary to defend the valuation if audited. Independent valuation firms, such as KPMG, BDO, Transaction Capital LLC, Carta, and Aranca, have the necessary expertise and certifications to provide accurate, defensible valuations.

Should You “Sandbag” Your 409A Valuation?

Some companies may be tempted to “sandbag” their 409A valuation by withholding positive information — such as potential acquisition offers or significant growth opportunities — in an attempt to lower their FMV. However, this practice is never recommended and can have serious consequences during an IRS audit.

A 409A valuation is designed to accurately reflect both the risks and opportunities of your business. Misrepresenting information can result in hefty tax penalties for both your company and your employees. Transparency with your valuation professionals is critical to ensure that your valuation accounts for all relevant factors and complies with IRS regulations.

How Long is a 409A Valuation Valid?

Typically, a 409A valuation is valid for up to 12 months. However, if a “material event” occurs that significantly affects your company’s value — such as new funding, a merger, or a major operational change — the valuation becomes invalid. In these cases, a new 409A valuation will be necessary to remain compliant with IRS requirements.

Firms That Specialize in 409A Valuations

Several well-established firms specialize in providing 409A valuations. Names like KPMG, BDO, Transaction Capital LLC, Carta, and Aranca are highly regarded for their expertise and ability to deliver IRS-compliant, audit-ready valuations. These firms employ professionals with certifications such as ASA, ABV, and CVA, which ensure that their valuations meet the highest industry standards.

Key Takeaways

Whether you’re a startup or an established business, securing a 409A valuation is critical for IRS compliance and proper equity compensation. Working with certified professionals who have a deep understanding of 409A valuations — such as those holding ABV®, ASA, CVA, or MRICS credentials — can help you mitigate risks and avoid costly penalties.

For startups, Transaction Capital LLC offers one of the best combinations of affordability, expertise, and personalized service, making it an ideal choice for early-stage companies. With pricing starting at $500, Transaction Capital LLC provides audit-ready 409A reports backed by certified professionals who specialize in helping startups navigate the complexities of equity compensation.

By choosing the right 409A valuation provider, you can ensure that your stock options are properly valued, compliant with IRS regulations, and that both your company and employees are protected from potential tax liabilities.