Is your 409A still valid?
The short answer
- Twelve months from the valuation date on the report
- Material events reset the clock whatever the date says
- What to do, in the order it needs doing
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Your valuation
Your valuation
The date the valuation is as of, not the day it was delivered.
Anything material since?
A priced round, a signed term sheet, an acquisition offer, or a large change in revenue. Any of them makes the last valuation stale.
What the safe harbor actually gives you
Section 409A taxes deferred compensation that does not follow its rules. An option with an exercise price below the stock’s fair market value on the grant date is deferred compensation, so the holder can owe income tax as it vests, a 20% additional federal tax and interest.
An independent appraisal creates a presumption that your price was reasonable. The IRS can rebut it only by showing the valuation was grossly unreasonable, which is a far harder argument than the one the company would otherwise have to win.
The presumption depends on two things: the appraisal is no more than twelve months old, and nothing material has happened since. Lose either and you are back to defending the price yourself.
The expiry is not a renewal date on a subscription. It is the day your grants stop being presumed correct.
When to order the next one
Six weeks before expiry
Straight after a round
Before a hiring wave
409A questions
How long is a 409A valuation valid?+
Twelve months from the valuation date, or until something material happens, whichever comes first. After that the safe-harbor presumption no longer covers grants you date.
What counts as a material event?+
A priced financing, a signed term sheet, an acquisition offer, a secondary sale at a price, or a large change in revenue or prospects. Any of them means the last valuation no longer reflects what the stock is worth.
What happens if we grant options on an expired 409A?+
You lose the presumption that the price was right. If the exercise price turns out to be below fair market value, the option can fall under Section 409A: the holder owes income tax as it vests, plus a 20% federal penalty and interest.
How long does a new 409A take?+
Days to a couple of weeks, depending on the provider and how quickly you send financials. Capable's 409A service is $1,499 and the report is signed by an appraiser of record.
Never wonder again
Capable records the valuation with its expiry, warns you 30 and 7 days out, and prices new grants at the recorded fair market value. 14-day free trial, no card.