TL;DR
You need a 409A valuation before you grant your first stock option, RSU, or other deferred-compensation award. After that, a 409A is presumed valid for 12 months or until a material event — whichever comes first. The most common founder mistake is not getting the initial 409A; the most expensive mistake is granting options against a stale 409A after a financing, a major customer win, or another event that has clearly changed your fair market value. Both mistakes risk losing the safe harbor presumption, exposing your employees to the 20% Section 409A excise tax and immediate income recognition on the entire deferred amount.
Issued options recently? Not sure if your 409A still holds up? Book a 20-minute call — I'll review your grant calendar against your 409A schedule and tell you whether you're covered.
When you need your first 409A
You need a 409A valuation before any of the following happens:
- Granting incentive stock options (ISOs) or nonqualified stock options (NSOs)
- Granting restricted stock units (RSUs) that vest based on time or performance
- Issuing other equity awards treated as deferred compensation under Section 409A
- Setting a strike price for any equity-linked compensation instrument tied to fair market value
Most founders hit this trigger sooner than they expect. Hiring your first engineer who negotiates an equity package, bringing on an advisor who wants stock instead of cash, or even adopting an equity incentive plan in anticipation of hiring — all of these can put you in 409A territory. A 409A commissioned after the grant, or backdated to align with the grant date, does not provide the same protection. The valuation must be in place at the time of the grant.
A practical note for pre-revenue companies
If you're truly pre-product, pre-team, and pre-capital, the formal 409A is a tool many of the earliest-stage founders defer. The common pattern: founders issue founder common stock at par at formation, hold off on the appraisal, and commission the first 409A before the first outside grant. That can be defensible while you're still operating out of founder stock and have nothing else going on. But the window is shorter than founders think. Once you've raised priced equity, brought on employees or advisors negotiating equity, signed material customer contracts, or had any other event that meaningfully changes the value picture, "we're too early for a 409A" stops being a defensible position. In practice, plan for the appraisal before the first grant, not after — and if you genuinely cannot justify the cost yet, at least map out the trigger event that will require you to commission one.
When your existing 409A goes stale
A 409A is presumed valid for the shorter of:
- 12 months from the valuation date, or
- The date a material event occurs.
The 12-month clock is mechanical. The material-event trigger is where founders get into trouble, because "material event" is a facts-and-circumstances test, not a hard rule. The IRS will know one when it sees one. Below is the working list I use with clients.
Material events that require a new 409A
1. A new financing round
The single most common trigger. A priced equity round — Series Seed, Series A, and beyond — almost always invalidates your prior 409A. Even an extension round at the same nominal pre-money can be a material event if the security terms (liquidation preference, anti-dilution, board composition) materially change the implied common stock value.
SAFEs and convertible notes do not automatically invalidate a prior 409A, but a large round on aggressive terms can. The conservative practice is to commission a new 409A within 30 to 60 days of a priced financing closing.
2. A significant change in your business
This is the catch-all that nervous founders ignore at their peril. Examples:
- A major customer contract that materially shifts revenue projections
- The loss of a key customer or product launch failure
- A pivot to a new product line, business model, or market
- A major regulatory development that affects your industry (think SEC or FTC enforcement, a court decision changing the legal landscape)
- A significant change in management or board composition
3. A pending or contemplated transaction
If you are negotiating an acquisition offer or letter of intent — even one you ultimately reject — that is generally a material event. The fact that a buyer made an offer at a particular price is information that changes the fair market value analysis.
4. Significant operational milestones
For early-stage companies in particular, hitting milestones like first revenue, profitability, or substantial new financing commitments can be material. The mistake is treating these as positive news that should be reflected later — the IRS views them as events that change value today.
5. Material changes to the cap table
A large secondary sale of common stock, a significant repurchase, or a transaction that meaningfully alters ownership distribution can each be material. A secondary sale at a specific price is particularly important because it is direct market evidence of fair market value that an appraiser cannot ignore.
6. The passage of time approaching 12 months
You do not have to wait until day 365 to refresh. Most well-advised companies plan to commission a new 409A roughly 60 days before the prior one expires, so the new report is in hand when needed for the next round of grants.
What "stale 409A" actually costs
This is where the abstract becomes painful. When a 409A is stale and the IRS or an acquirer concludes the strike price was below fair market value, the consequences land on the employees who received the options:
- 20% federal excise tax on the entire deferred amount under Section 409A(a)(1)(B)(i)(II)
- Immediate income recognition on the in-the-money portion, not just on exercise
- Interest at the IRS underpayment rate, plus a 1-percentage-point premium
- Potential state tax penalties in states that conform to federal 409A
These taxes are imposed on the employee, not the company — which makes a defective 409A also a serious employee-relations problem. I have seen founders absorb the tax personally to avoid losing key staff. That is a charity bill the company writes for a mistake that was entirely preventable.
The refresh schedule I recommend to clients
For early-stage startups, the practical 409A cadence usually looks like this:
| Event | New 409A required? |
|---|---|
| First option grant | Yes — must have one in hand |
| Series Seed / priced round | Yes — within 30–60 days |
| Series A | Yes — coordinate with closing |
| 12 months elapsed (no material event) | Yes — refresh on schedule |
| Major SAFE round (>$2M) | Yes — usually conservative practice |
| Convertible note round | Discuss with counsel; often yes |
| First significant revenue / customer wins | Often yes — facts-and-circumstances |
| Approaching IPO or acquisition | Likely quarterly refresh |
Three places founders go wrong
1. Treating 409A as a finance department task. A 409A is a legal-defense document first and an accounting input second. Founders who delegate it entirely and never look at the report often discover the methodology was wrong or the assumptions were unsupportable — but only after the damage is done. For more on who actually sees your 409A and when it shows up in diligence, see Are 409A Valuations Public?.
2. Granting options "as of" an older date to use an older 409A. Backdating option grants to align with a stale 409A is one of the fastest ways to lose the safe harbor presumption and create separate securities and disclosure problems. Don't.
3. Assuming SAFEs and notes don't move the needle. They sometimes do. A large convertible note round on tight terms changes the implied common stock value. The right answer is a conversation with counsel, not an assumption.
Frequently asked questions
How often do I need a new 409A? At least every 12 months, and immediately after any material event (most commonly a priced financing round).
Is a SAFE round a material event? Not automatically, but a large SAFE round on aggressive terms often is. Conservative practice is to refresh after any significant funding event.
Can I get a 409A after I've already granted options? You can, but it does not retroactively cure a grant that was made without a defensible 409A valuation. The 409A must be in place before the grant.
Does the IRS audit 409A valuations? Yes — typically in connection with corporate tax audits, employment tax audits, or executive compensation reviews. The IRS is also active in M&A and IPO contexts where 409A becomes visible.
What if my financing round closes at a price below my last 409A? This is increasingly common in down rounds. A new 409A should be commissioned to reflect the lower implied fair market value. Continuing to grant at the higher prior strike price is not in the employees' interest.
A lawyer's bottom line
The cost of a 409A is $3,000 to $8,000. The cost of granting options against a defective or stale 409A can run into six figures of taxes and penalties, plus a permanent stain on diligence in the next round or sale. Treat 409A as scheduled legal maintenance, not as a discretionary expense to be deferred.
If your last 409A is more than nine months old, or if you've had a financing close, a major customer development, or a significant operational change since it was issued, the conversation worth having today is whether you need a refresh before your next grant. For a broader treatment of how 409A fits into your overall equity compensation strategy, start with our pillar guide.
Issued options recently? Not sure if your 409A still holds up? Book a 20-minute call — I'll review your grant calendar against your 409A schedule and tell you whether you're covered.
