Basic information about 409A valuations - a critical tax law that governs options granted to startup founders and employees.

1. 409A VALUATIONS: A
PRIMER
PLEASE NOTE: THE INFORMATION PROVIDED IN THIS PRESENTATION IS NO T LEGAL
ADVICE, WHICH IS UNIQUE TO YOU AND YOUR NEEDS.
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PROVIDERS, AND VENTURE CAPITALISTS, HANDLING STARTUP FORMATIONS,
EMPLOYMENT ISSUES, FINANCINGS, AND M&A. IF YOU’D LIKE MORE INFOR MATION
ABOUT THE 409A VALUATION, OR ITS IMPACT ON YOU OR YOUR COMPANY, PLEASE GIVE
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2. 409A Valuations: A Primer
Popular subject emerging in startup and financing circles
grounded in tax code (26 U.S.C. Section 409A).
Section 409A defines the tax implications of including in gross
income deferred compensation under nonqualified deferred
compensation plans.
How might it affect you and your startup?

3. 409A: Some Context
Generally, 409A valuations assist companies with setting the strike price for employee stock
options, which needs to be at or above fair market value.
Option: In a startup corporation (company) context, a benefit given by a company to an
employee to buy stock in the company at a discount or at a stated fixed price. Options are
highly-touted, particularly in emerging blue chip companies.
Strike price: In a startup corporation context, the price at which the holder of an option to buy
stock or sell stock when the option is exercised.

4. 409A General Rule
409A: If the strike price is not at or above fair market value, there are severe tax consequences
and possible penalties incurred by the holder of the option, including immediate taxation, a 20%
penalty tax, and interest payments.
Fair market value: per 409A, determined using “reasonable application of a reasonable valuation
method”; this valuation needs to be performed by someone who is qualified based on their
knowledge, training, and experience.
Valuation needs to be updated at least every 12 months, or upon each new financing or grant
date of the option.

5. The Appraisal Valuation Process
DIY: Remember, the fair market value must be determined using reasonable application of a
reasonable valuation by someone who is qualified to do so. Note: DIY squarely places the risk
upon you – if you are audited, you have the burden of proof.
Firm Valuations: Qualified appraiser conducts fair market valuation, but the cost of the service is
generally quite pricy. However, your biggest value is the protection by safe harbor – that if you
are audited, the burden of proof is on the IRS to disprove statements and methods by the
qualified appraiser, therefore shifting some of the risk away from you.