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Transaction Capital LLC is a “ONE STOP SOLUTION” for all sorts of Valuation requirements such as 409A Valuation, SBA 7a Valuation, Purchase Price Allocation, Intangible Valuation, Option Valuation, Convertible Valuation, Litigation Valuation, Financial Modelling, Business Plan, Feasibility study, Market Research, Go to Market Strategy and Legal Consultancy.

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What is a 409A Valuation? A Complete, IRS-Compliant Guide for Startups in 2025

A certified, independent assessment of the fair market value (FMV) of a private company’s common shares is known as a 409A valuation. This valuation, required by Internal Revenue Code Section 409A, is crucial for businesses that offer equity compensation in the form of restricted stock units (RSUs) or stock options. It ensures complete IRS compliance and protects the business and its employees from tax penalties.

Why Do New Businesses Require a 409A Valuation?

The following crucial factors require startups to obtain a 409A valuation:

IRS Compliance: Steer clear of immediate taxes and the federal excise tax of 20%.

  • Equity Compensation: Give workers RSUs and stock options in a legal manner.
  • Audit Protection: With a defendable FMV, obtain IRS safe-harbour status.
  • Investor Confidence: Transparency and trust are enhanced by a validated value.

M&A and IPO Preparation: One of the most important requirements for exit event due diligence is a 409A.

Commonly Asked Questions (FAQs) Regarding 409A Assessment.

1. Can I utilise my valuation from the previous investment round?

No, preferred shares, which have rights not applicable to common stock, are included in fundraising round valuations. A 409A valuation specifically determines the FMV of common shares alone.

2. How frequently should my 409A valuation be updated?

Your 409A needs to be updated at least once every 12 months or earlier if:

  • You raise funds, such as convertible notes or SAFEs.

  • You enter a new market or introduce a new product.

  • You get ready for an IPO or M&A.

3. Can I perform the valuation in-house?

No, an independent third party must complete the valuation to be eligible for IRS safe harbour protection.

4. What paperwork is needed?

  • Current financial accounts, whether internal or audited

  • Current cap table

  • Information about earlier fundraising campaigns

  • Pitch deck or business plan

  • Financial projections

  • Terms of the share class and the entire equity incentive scheme

  • Date of specific valuation

5. What is the duration of a 409A valuation?

Four to five business days is the typical turnaround time. There might be a chance for expedited service.

6. What is the price of a 409A valuation?

The usual price range is between $1,000 and $5,000.

Valuations from Transaction Capital LLC start at $500.

Topics for Expert-Level 409A

7. What techniques are employed for valuation?

 

  • Cash Flow Discounted (DCF)

  • Comparables in the market (public and transactional)

  • Valuation Based on Assets

  • Hybrid Techniques (combining market comps and DCF)

8. DLOM: What is it?

 

The difficulties in selling private firm stock are evident in the Discount for Lack of Marketability (DLOM), which typically reduces the fair market value (FMV) of common shares by 20% to 40%.

 

9. Are convertible note caps acceptable for FMV?

 

No, cap values do not meet IRS standards for 409A and do not reflect true FMV.

 

10. What occurs if my 409A is not correct?

 

  • Stock options are subject to immediate taxes.

  • Federal excise tax of 20%

  • Interest and back taxes

  • Risks of noncompliance and harm to one’s reputation

  • Delays in IPOs, acquisitions, or financing

11. What impact do liquidation preferences have on 409A valuations?

 

When considering dividends, liquidation preferences favour preferred shares, resulting in reduced payouts for common shareholders. Consequently, common stock typically holds a value between 20% and 40% of the price of preferred shares.

Regulatory Framework and Certifications

Who is qualified to issue a 409A valuation?

 

A qualified appraiser is required by IRS Revenue Rulings 59-60 and 68-609 to:

 

  • Possesses over five years of experience in valuing

  • Be separate from the business.

  • Respect SSVS, USPAP, and moral principles

  • Among the preferred certificates are:

  • Accredited in Business Valuation, or ABV®

  • Accredited Senior Appraiser (ASA®)

  • Certified Valuation Analyst, or CVA®

  • Chartered Valuation Surveyor, or MRICS®

Professionals with these qualifications work at Transaction Capital LLC, which has completed more than 1,500 valuations in a variety of industries.

 

ASC 718: What is it?

 

The way businesses account for stock-based remuneration is governed by ASC 718. According to U.S. GAAP, accurate and audit-compliant expense reporting is ensured by a valid 409A value.

Frequently Held Myths Regarding 409A Valuation.

Can our board establish the FMV?

 

No, the IRS safe harbour is only applicable to third-party valuations.

 

Do I need to “sandbag” the appraisal?

 

No, lowering FMV artificially could lead to audits and reduce worker morale.

 

What is the reason behind my 409A’s lower valuation than post-money?

 

Compared to preferred shares valued in venture capital rounds, 409A values common stock, which entails greater risk and fewer protections.

 

Is a low price always preferable?

 

Only if it is true and tenable does setting it too high reduce employee incentives, while setting it too low invites inquiry.

How Is a 409A Valuation Performed?

Step 1: Calculate the Enterprise Value

 

Among the techniques are:

  • DCF
  • Market Comparables
  • Asset-Based Valuation

Step 2: Allocate Value by Share Class

 

Applications of valuation allocation:

  • OPM, or option pricing method, is used by early-stage entrepreneurs.
  • If there are several escape routes, PWERM
  • The Current Value Method (CVM) is used for basic or damaged cap tables.

Step 3: Use DLOM

 

Common stock is subject to a Discount for Lack of Marketability to account for illiquidity.

What Is IRS Safe Harbor Protection?

The IRS will assume your 409A value is legitimate under safe harbour if it is:

 

  • Carried out by a certified, impartial appraiser
  • Using up-to-date, pertinent company data
  • updated following major business events or at least once a year.

This classification reduces the danger of audits and penalties.

When Should You Update a 409A Valuation?

When you raise a new round of capital, including convertible notes or SAFEs, you should update your value.

 

  • You introduce a new product or grow your business.
  • You issue RSUs or fresh stock options.
  • Changes in leadership or structure
  • Twelve months have passed since your previous 409A valuation.

What If You Skip a 409A Valuation?

Immediate stock option taxes may occur if a 409A valuation is not obtained or updated.

 

  • A federal excise tax of 20%
  • Penalties and back taxes
  • adverse audit results
  • Investor investment or M&A activity delays
  • Reduced motivation and trust among the team

Why Choose Transaction Capital LLC?

  • Professionals with certifications in MRICS, ABV, ASA, and CVA
  • More than 15 years of expertise in a variety of sectors
  • Complete adherence to SSVS, USPAP, ASC 718, and IRS 409A
  • Transparent pricing: $500 is the starting price
  • Quick delivery: four to five working days

Start Your 409A Valuation Today

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