409A valuations and option strike prices

An independent view of the common share price

A 409A valuation is an appraisal of the fair market value of a private company’s common stock, named after the US tax code section that governs deferred compensation. Companies obtain one so that stock options can be granted with a strike at or above fair market value, which is what keeps them outside that section’s penalties.

It values common stock, which is not the same as the price an investor paid for preferred stock in the last round. Preferred shares carry liquidation preferences and other rights that common shares do not, so a common-share value is normally lower, and substituting the preferred price for it is neither conservative nor correct.

Why the strike follows the valuation

Granting an option with a strike below fair market value creates tax exposure for the holder, not for the company alone. That is why the grant-date valuation matters more than the valuation in force when the paperwork is signed: the option is measured on the day it is granted.

In Cap Table, the strike field prefills from the recorded valuation in force on the grant date and follows that date if you change it. A strike typed below that value raises a warning naming the valuation and the date it was set. The warning is a prompt to check the figure and the date, not a determination that a grant is or is not compliant.

When a valuation needs refreshing

Two events are the usual triggers for a new valuation: the passage of time and a priced financing. Twelve months is the conventional refresh interval, and a round that prices the company is a material event regardless of when the last valuation was done.

The app flags both. A recorded valuation twelve months old or more is reported as stale, and a valuation overtaken by a priced preferred issuance is reported as predating the latest priced round. A common certificate issued at par afterwards is not treated as a new pricing event. Both flags appear in Needs attention, and both are review prompts rather than professional conclusions.

Keep the value, its date, and its report together

Record the effective date, the value per share, and a note identifying the provider or the event, and attach the report to the valuation entry. Reports select the valuation in force on the relevant grant or exercise date, so correcting valuation history can change option strikes, expense figures, and Form 3921 supporting data at once.

When backfilling a valuation dated before a recorded stock split, enter the price in today’s post-split units and compare the historical equivalent the form shows with the provider’s report. See Record and maintain 409A valuations for the workflow, including the limit on how many valuations a company keeps and what a deletion affects.

Cap Table records a valuation you supply. It does not perform one, select a methodology, or establish that a value is supportable for any purpose.