The fair market value of the company’s common shares is determined using the 409A valuation. As a result, if the startup grants stock options with an exercise price equal to the fair market value of each share of common stock as determined by the 409A valuation and follows certain other rules, the burden of proof shifts to the IRS to prove that the stock options exercise price was not at least at fair market value. A method and collection of methods for determining the economic value of an owner’s interest in a business are known as business valuation. Financial market participants employ a variety of valuation techniques to estimate the amount they are willing to pay or receive in order to complete a business sale. However, higher business valuation affects 409a valuation in many ways.

1. How Does High Valuation
Affect 409 Valuation?
The main purpose of a 409A valuation in
startups is to properly value stock options that
you give to employees for tax purposes (in
non-startups, it can be used for any kind of
“non-deferred compensation”.

2. The higher stock options price
Higher Share Price
When you acquire a 409A valuation, the
company or person who performs it will
take a pragmatic, formulaic, almost
investment-banking analytical approach
to assess your company’s value and, by
extension, the value of your stock
options

3. Higher taxes for personal
salary tax
Higher Share Price
When dealing with investors, however,
the appraisal procedure is the polar
opposite. It’s non-formulaic, non-
analytical, and is generally “backed into”
by determining how much funding a
company requires, how much equity
investors want/need to hold in the
company, and then basing the valuation
on the result of those two factors