409A Valuation Services
IRS-compliant 409A Valuations to set strike prices for employee stock options. Achieve Safe Harbor status with independent, audit-ready reports delivered by expert valuation professionals.
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What is 409A Valuation?
A 409A Valuation is an independent appraisal of the Fair Market Value (FMV) of a private company’s common stock. It is named after IRC Section 409A, a US tax regulation that mandates that any stock options or equity-based compensation granted to employees must be priced at or above the fair market value. Unlike fundraising valuations that focus on "Preferred Stock," a 409A specifically determines the value of "Common Stock."
At Biz Valuations, we specialize in helping startups and private companies navigate these complex IRS requirements. We provide the technical rigour needed to establish a "Safe Harbor," shifting the burden of proof to the IRS and protecting your employees from significant tax penalties. Our reports ensure your equity plan is a powerful retention tool, not a liability.
Why You Need a 409A Valuation
Issuing stock options without a valid 409A report can lead to severe tax consequences for your team. We provide defensible reports for:
Issuing Stock Options
Setting the Strike Price (Exercise Price) for ESOPs, RSUs, and Stock Appreciation Rights (SARs).
IRS Safe Harbor
Establishing a "presumption of reasonableness" that protects the company during an IRS audit.
Qualified Financing Rounds
Updating your valuation after raising a new round of preferred capital (Series A, B, etc.).
Material Events
Refreshing your value after major milestones, such as a large acquisition, secondary sale, or product launch.
Audit & IPO Readiness
Providing the historical FMV data required during financial audits and S-1 filings for an IPO.
Who Needs 409A Valuation Services?
Compliance Solutions for Growing Private Companies Our 409A team supports companies across various stages of growth:
Key Benefits of Working with Biz Valuations
A 409A valuation is more than just a number; it is a legal shield for your employees' wealth.
409A Valuation Triggers
Timing is critical to maintaining your Safe Harbor status. You need a 409A valuation:
Our Valuation Methodologies
We apply IRS-approved methods according to your company's stage and complexity:
Market Approach (Backsolve)
Using the price paid by investors in a recent funding round to "solve" for the value of common stock.
Income Approach (DCF)
Projecting future cash flows and discounting them to determine the current enterprise value.
Asset Approach
Estimating the replacement cost of your assets, typically used for pre-revenue or asset-heavy startups.
PWERM (Probability Weighted Expected Return Method)
Modeling various future outcomes (IPO, Sale, Dissolution) and weighting them by probability.
Regulatory Compliance & Standards
Our 409A practices according to the strictest US tax and accounting frameworks:
- IRC Section 409A: The primary tax code governing nonqualified deferred compensation.
- AICPA Valuation Guide: Following "Valuation of Privately-Held-Company Equity Securities Issued as Compensation."
- ASC 718: Providing the fair value inputs required for financial reporting of stock-based compensation expenses.
- USPAP: Adhering to the Uniform Standards of Professional Appraisal Practice for independent assessments.
Our 4-Step 409A Roadmap
1. Discovery & Data Collection
We gather your cap table, articles of incorporation, historical financials, and 3-5 year projections.
2. Equity Value Determination
We calculate the Enterprise Value using the most appropriate methodology (Backsolve, DCF, or Market).
3. Waterfall Allocation
We allocate that value across the capital structure to determine the Common Stock FMV.
4. Board Approval
We deliver a final report for your Board of Directors to review and formally adopt as the new strike price.
Specialized 409A Services
We address the technical nuances that automated platforms often overlook:
DLOM Analysis
Calculating the Discount for Lack of Marketability to reflect that private stock cannot be easily sold.
Volatility Benchmarking
Deriving appropriate volatility percentages from a peer group of comparable public companies.
Hybrid Methodologies
Combining OPM and PWERM (The Hybrid Method) for companies nearing a potential exit.
Secondary Transaction Analysis
Evaluating the impact of "Common-to-Common" share transfers on the 409A strike price.
Cap Table Sensitivity
Modeling how liquidation preferences and participation rights impact common shareholders.
Frequently Asked Questions
1What is the main difference between 409A and Fundraising Valuation?
A fundraising valuation (Post-money) focuses on the value of Preferred Stock. A 409A values Common Stock, which is almost always lower due to lack of liquidity and secondary rights.
2What is "Safe Harbor" status?
Safe Harbor means the IRS presumes your valuation is "reasonable." To get this, you must use a qualified, independent third-party appraiser.
3Can my CPA do my 409A valuation?
While a CPA can do it, if they have a financial interest in your company or provide other material services, you may lose your "Independent Appraisal" Safe Harbor.
4What are the penalties for 409A non-compliance?
If the IRS finds your options were undervalued, employees face immediate income tax on vested options, a 20% federal penalty tax, and accrued interest.
5How often do I need a 409A refresh?
At least once every 12 months or after any "Material Event" (like a new funding round).
6What is a "Strike Price"?
The Strike Price is the set price at which an employee can buy their shares in the future. It must be at least equal to the FMV determined by the 409A.
7How is DLOM calculated?
The Discount for Lack of Marketability is calculated using models like the "Finnerty" or "Chaffe" put option models, typically ranging from 15% to 35%.
8Can one 409A report be used for multiple option grants?
Yes, a single 409A report is valid for all options granted within 12 months of the report date, provided no material event occurs in between.
9Does a 409A valuation apply to non-US employees?
If the company is US-based or the employees pay US taxes, 409A is mandatory. Many international companies also use 409A as a global "best practice" for setting strike prices.
10What is the "Backsolve" method?
The Backsolve method uses the price paid by investors in a recent funding round (usually Preferred stock) to mathematically determine the value of the Common stock.
Empower Your Employees. Protect Your Startup.
In the competitive world of talent, your equity is your edge. Don't let a "guess-work" strike price lead to an IRS nightmare for your team. Get a 409A valuation that provides absolute Safe Harbor and peace of mind.
Partner with Biz Valuations for independent, audit-ready 409A expertise.