You want to grant your first employee stock options. Before a single option goes out the door, you need a 409A valuation — an independent appraisal of your common stock's fair market value. Skip it, or price options below that value, and the tax bill lands on your employees: immediate income tax on paper gains, a 20% federal penalty on top, plus interest. Here is what a 409A valuation actually does, when you need one, and what you should expect to pay.
What a 409A valuation actually does
A 409A valuation is an independent appraisal of the fair market value of your company's common stock. The name comes from Section 409A of the Internal Revenue Code, which treats options granted below fair market value as deferred compensation — and taxes them punitively.
The per-share number the appraiser lands on becomes the floor for your option strike prices. Grant at or above it and you're compliant. Grant below it and every optionee is exposed.
One thing a 409A valuation is not: your fundraising valuation. Investors price preferred stock, which carries liquidation preferences and other rights common stock doesn't have. Appraisers also apply discounts for lack of marketability. So a company that just raised at $2.00 per share preferred might get a common-stock FMV of a fraction of that — and that's normal. Cooley notes it is very rare for a low 409A number to anchor a future financing negotiation.
What the 409A number controls
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Option strike prices: The minimum exercise price for every option you grant to employees, advisors, and contractors.
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Your employees' tax exposure: Grants below FMV trigger immediate taxation, not taxation at exercise or sale.
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Diligence readiness: Acquirers and investors check 409A compliance; gaps become escrow holdbacks and re-pricing exercises.
Your investors price the preferred. The appraiser prices the common.
When you need a 409A valuation — and when to refresh
The rule is simple: get one before your first option grant, then keep it current. There is no de minimis exception for small teams or tiny grants.
A 409A valuation is valid for up to 12 months — or until something material changes your company's value, whichever comes first.
Events that require a fresh 409A
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Your first option grant: A valid valuation must be on file before any equity compensation goes out.
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A priced funding round: The most common trigger. A new round resets what your company is worth.
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The 12-month clock expiring: Safe harbor protection lapses at 12 months even if nothing changed.
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A material event: An acquisition offer, a secondary sale, a transformative customer contract, or a major pivot can all stale-date your valuation early.
Most valuations take one to three weeks once the appraiser has your cap table and financials. If you're planning a hiring wave or closing a round, start the refresh before you need to make grants — not after.
The clock is 12 months. Material events run faster.
Safe harbor is what you're paying for
When a qualified independent appraiser performs the valuation, you get safe harbor under the 409A regulations: a presumption that your valuation is reasonable. That flips the burden of proof. Instead of you defending the number, the IRS has to show the valuation method — or how it was applied — was grossly unreasonable. That is a high bar, and it makes successful challenges rare.
There are three safe harbor paths in the regulations, but the independent appraisal method is the one nearly every venture-backed startup uses. A founder-set price, or a number your lawyer sketched from your last round, gets no presumption at all.
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12 months: How long the independent-appraisal safe harbor holds, absent a material event.
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"Grossly unreasonable": The standard the IRS must meet to overturn a safe-harbor valuation.
A cheap valuation with safe harbor beats an expensive guess. The signature is the protection.
What a 409A valuation costs
Most venture-backed startups pay somewhere between $1,500 and $9,000, and where you land depends on stage and cap-table complexity more than company size.
Typical 2026 pricing by stage
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Pre-revenue / seed: $1,500–$3,500 for a clean cap table with no institutional investors or convertible instruments.
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Series A and B: $2,500–$6,000 once you have priced rounds, preferred stock, and early revenue.
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Mid-stage with complexity: $3,500–$9,000 with meaningful revenue and layered preferred terms.
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Late-stage / pre-IPO: $10,000–$25,000+ from Big 4 or enterprise firms once audit and SEC scrutiny are in play.
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Annual renewals: Typically 30–40% less than the first valuation, since the appraiser already knows your business.
Software-enabled valuation providers have compressed pricing at the low end, with some seed-stage reports starting under $1,000. The price tag doesn't determine defensibility — a qualified independent appraiser with an audit-ready process does. The mistake isn't buying cheap; it's buying a report that won't hold up.
Getting it wrong lands on your employees
A botched or missing 409A doesn't primarily hurt the company. It hurts the people you gave equity to instead of salary.
If the IRS determines options were granted below fair market value, Section 409A makes the deferred amounts includible in income as they vest — before any shares are sold, before any cash exists to pay the bill. Then it stacks two additional taxes on top.
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20%: The additional federal tax under Section 409A on amounts includible in income, per the IRS's own audit guide.
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Premium interest: An underpayment-rate-plus-1% interest charge dating back to when the amounts should have been taxed.
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50%+: What combined federal and state liability can exceed in a high-tax state like California, on top of ordinary income tax.
There's a second-order cost too: 409A gaps surface in every serious diligence process. What would have been a $3,000 valuation becomes a negotiation about indemnities and option re-pricing in the middle of your round or exit.
Employees took equity instead of salary. Don't hand them a tax bill instead of upside.
A calendar problem, not a judgment problem
The 409A is one of the few startup legal obligations that is almost purely operational: pick a credible provider, refresh on the right triggers, and paper your grants against a valuation that's in force. The failure mode is never sophistication — it's the round that closed eight months ago, the grants that went out last week, and nobody noticing the gap.
That's the kind of thing the OneGC platform is built to catch. OneGC gives startups a fractional GC who tracks equity-grant hygiene alongside the contracts and compliance work — board approvals, option paperwork, and the 409A refresh calendar — under flat monthly pricing instead of an hourly meter. When you're ready to make grants, the legal side is already in order.
Sources
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IRS, Nonqualified Deferred Compensation Audit Technique Guide (Publication 5528). Amounts includible in income under Section 409A are subject to a 20% additional tax plus premium interest at the underpayment rate.
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Cooley GO, What Is the Difference Between 409A Valuations and Venture Capital Valuations? Independent third-party valuations provide a Section 409A safe harbor, are valid for one year unless a material event intervenes, and price common stock differently than a financing prices preferred.
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Burkland, 409A Valuations for Startups: Cost, Timing & Rules (August 2026). 2026 pricing benchmarks by stage, refresh triggers, the three safe harbor methods, the "grossly unreasonable" standard, and typical one-to-three-week turnaround.