First-time founders who just heard the term and need to know what it is and, specifically, when they're required to get one.
What Is a 409A Valuation — and When Do You Need One?
The definition matters less than the timing. Here's what triggers the legal requirement to get one.
Know exactly when your next valuation is due, tied to your actual cap table events.
A 409A valuation is an independent appraisal of your company's common stock fair market value, used to legally set the strike price on new option grants. The definition is simple. The part founders actually get wrong is when a new one is legally required.
The Events That Trigger a New 409A
You need a fresh 409A whenever: (1) it's been more than 12 months since your last one, (2) you've closed a new priced funding round, or (3) a "material event" has happened — a major new contract, a pivot, or a significant change in headcount or revenue. Any one of these resets the clock.
What Happens If You Grant Options on a Stale 409A
Granting options against an outdated valuation exposes both the company and the recipient to IRS penalties under Section 409A — including immediate taxation and a 20% additional tax for the employee. This is the actual risk, not just an administrative inconvenience.
- 12 months is the hard ceiling, even with no other trigger event
- A new priced round always resets the clock, no exceptions
- "Material event" is a judgment call — when in doubt, get a new one
Frequently Asked Questions
When exactly do I need to get a new 409A valuation?
You need a new one after 12 months from your last valuation, immediately after closing a new priced funding round, or after a material event that changes your company's value — a major contract, pivot, or big revenue or headcount shift.
- Set a calendar reminder for the 12-month deadline the day you get one
- Order a new 409A as part of your funding round close checklist
- When a material event is ambiguous, get a new valuation anyway
What happens if I grant stock options using an outdated 409A?
The strike price may no longer reflect fair market value, which can trigger Section 409A penalties — immediate taxation of the option's value plus a 20% additional tax for the recipient. This risk falls on the employee, not just the company.
- Confirm your 409A is current before every new grant, not just annually
- A single stale grant can create tax liability for that specific employee
- Fixing this after the fact is far more expensive than staying current
The Lovie Advantage
Most founders track their 409A expiration date separately from their cap table, which is exactly how grants slip through on a stale valuation. Internal Link: Lovie Cap Table Management ties your valuation date directly to every option grant, flagging it automatically before a new round or the 12-month deadline.
Trying to understand the actual number itself, not just the timing? See Internal Link: 409A Valuation vs. Fair Market Value — What's the Difference. For the statutory basis of these rules, Cornell Law School's Wex legal dictionary has a plain-language overview.
Track Your 409A Timeline in Lovie
Know exactly when your next valuation is due, tied to your actual cap table events. Start Free with Lovie