How to Get a 409A Valuation: Process, Cost, and Providers Compared

If you've hired a single employee and granted them stock options, you need a 409A valuation. This isn't optional and it's not something to put off until your next funding round.

Section 409A of the Internal Revenue Code governs deferred compensation — including stock options. If your employees receive stock options with an exercise price below the fair market value of the common stock, the IRS treats that as deferred compensation and imposes a 20% penalty tax on the employee, plus interest. The company can face penalties for failing to withhold. And your VCs will demand you get one done at due diligence anyway, often before they'll close.

Here's everything you need to know to get this done correctly.

What Is a 409A Valuation?

A 409A valuation is an independent appraisal of your company's common stock for the purpose of setting the exercise price of employee stock options.

The "409A" refers to the IRS code section. The valuation is performed by an independent third party (not your CFO, not your accountant) and must comply with specific IRS requirements under the 409A regulations and the American Jobs Creation Act.

The output is a Fair Market Value (FMV) per share of common stock. That FMV becomes your option strike price — the price employees pay to exercise their options.

Your common stock is worth less than your preferred stock (the stock your VCs hold). This is because preferred stock comes with liquidation preferences, anti-dilution rights, and other protections. A proper 409A valuation accounts for this discount.

At the seed stage, common stock typically trades at 10-20% of the preferred stock price. At Series B+, that discount narrows to 25-35%. This discount is real and meaningful — it's what makes employee options genuinely valuable.

When Do You Need One?

Required events:

• Before issuing any stock options to employees or advisors
• Within 12 months of your last 409A (valuations expire after 12 months)
• After any material event that could change the company's value, including:

- Closing a priced equity round (seed, Series A, B, etc.) - A significant change in business trajectory (major new customer, loss of key customer) - An acquisition offer or M&A activity - Completing a material financing (new debt, convertible notes above ~$1M)

Rule of thumb: Get a new 409A after every funding round, even if your last one is less than 12 months old. Investors will ask for it, and the new round valuation changes the company value materially enough that your prior 409A is effectively stale.

The Process: What Actually Happens

Getting a 409A takes 2-6 weeks depending on the provider and how responsive you are with documentation. The steps:

1. Gather your documents (your job)

You'll provide:

• Cap table (fully diluted, with all options, warrants, SAFEs, convertible notes)
• Most recent 12 months of financial statements (P&L, balance sheet, cash flow)
• Trailing 12-month revenue and any financial projections
• Description of your business model, market, and competitive landscape
• Any recent term sheets, investment offers, or indications of value
• List of comparable public companies (optional, but helpful)
• Copies of any prior 409A valuations

2. The valuer analyzes your company

The appraiser applies one or more IRS-approved valuation methods:

• Income approach (DCF): Discounts projected future cash flows to present value. Common for companies with predictable revenue.
• Market approach: Compares your company to recent transactions or public companies in the same space. Common for early-stage companies without reliable cash flows.
• Asset approach: Values the company based on net assets. Used primarily for very early pre-revenue companies.

Most appraisers use a combination of approaches and apply a Black-Scholes or option pricing model (OPM) to allocate the company's total equity value across different stock classes.

3. Backsolve (for recently funded companies)

If you just raised a priced round, appraisers often use a "backsolve" method — they work backward from the price paid by your investors to determine the common stock FMV. This is clean, defensible, and fast.

4. Review and deliver the report

The provider sends you a draft report. Review it carefully — check that the cap table inputs are correct, the comparable companies make sense, and the discount applied to common vs. preferred seems reasonable. Ask questions if something looks off.

The final report is a formal legal document, typically 30-60 pages. You'll use it to set option strike prices and it must be available if the IRS ever audits your equity grants.

Cost Breakdown: What You'll Actually Pay

409A costs range from $1,000 to $15,000+ depending on company stage and provider type.

Automated platforms ($1,000-$2,500) Providers like Carta, Pulley, and Capshare offer algorithm-assisted 409A valuations that are fast (1-2 weeks) and affordable. These work well for pre-Series A companies with clean, simple cap tables.

Independent valuation firms ($2,500-$5,000) Firms specializing in startup valuations — like Andersen Tax, Intrinsic, or Valley Valuations — offer more personalized service and deeper analysis. Better for complex cap tables or if you expect IRS scrutiny.

Big 4 and national accounting firms ($8,000-$15,000+) Ernst & Young, Deloitte, PwC, and KPMG offer defensible 409A valuations for late-stage and pre-IPO companies. The brand name matters when you're filing an S-1 or going through an acquisition. Overkill for seed/Series A.

Negotiating point: Many providers offer discounted rates for early-stage companies doing their first 409A. Ask.

Provider Comparison

Carta

Carta is the most commonly used 409A provider among early-stage startups, primarily because most companies are already using Carta for cap table management.

Pros:

• Fast (often 5-10 business days)
• Integrated with your existing cap table — no data re-entry
• Good enough for most seed/Series A purposes
• $1,500-$3,000 depending on complexity

Cons:

• Algorithmic process with limited human review
• Less defensible if the IRS audits you
• Some investors (especially at Series B+) prefer independent firm reports
• Customer support can be slow

Best for: Pre-seed through Series A companies with straightforward cap tables.

Independent Valuation Firms

Firms like Andersen Tax, Scalar, Intrinsic, and similar boutique valuation shops provide a middle ground — more personalized than Carta, more accessible than Big 4.

Pros:

• Human reviewer who knows startup valuations
• More defensible in an audit or acquisition diligence
• Can handle complex cap tables (multiple SAFEs, tranched notes, complex waterfalls)
• Better at explaining the assumptions if investors challenge the report

Cons:

• 2-4 week turnaround typically
• Higher cost ($2,500-$5,000)

Best for: Series A and later, or any company with a complex cap table or unusual financing instruments.

Big 4 (EY, Deloitte, PwC, KPMG)

These firms are the gold standard for 409A quality and defensibility — but they're priced accordingly.

Pros:

• Maximum defensibility for audit, acquisition, or IPO
• Brand name that institutional investors and acquirers recognize
• Full-service relationship that can handle your audits, tax filings, and valuations in one place

Cons:

• $8,000-$15,000+ per valuation
• Slower process (3-5 weeks)
• Overkill for most early-stage companies

Best for: Series B+, pre-IPO, or companies going through an M&A process.

What Affects Your 409A Valuation

Factors that increase your common stock FMV:

• Higher preferred stock price from recent funding
• Strong revenue growth
• Large TAM with defensible market position
• Recent M&A activity at high multiples in your sector

Factors that decrease the FMV (working in your favor for employee options):

• Early stage with limited revenue — pre-revenue or early traction
• Large liquidation preference stack (multiple rounds of preferred)
• High volatility/risk
• Long time to expected liquidity

The more preferred liquidation preference you have sitting above common, the lower the common stock FMV relative to preferred. That's why 409A discounts narrow as companies mature — at Series C or D, the liquidation preferences aren't as dilutive relative to total company value.

Common Mistakes

Waiting too long after a funding round. Every day you issue options without an updated 409A, you're creating a potential IRS problem. Get the valuation done within 60 days of closing a priced round — sooner if you're actively making grants.

Using the same provider without re-evaluating. Most early-stage companies default to Carta forever. That's fine through Series A. By Series B, independent or Big 4 reports are worth the extra cost for diligence credibility.

Ignoring the 12-month expiration. Set a reminder. Many companies don't realize their 409A expired and continue making grants — then have to do a "repricing" retroactively, which is painful and expensive.

Not reviewing the report. A 409A with an error in the cap table inputs is a 409A that exposes you to audit risk. Always verify the cap table matches your actual records before finalizing.

Trying to get a low 409A on purpose. The point of a 409A is to establish a defensible FMV, not to game the number. Appraisers are independent and won't sandbag a report to make your options look cheap. If they did, you'd lose the safe harbor protection — which is the whole point.

The Safe Harbor Protection

If you use a qualified independent appraiser and follow the process correctly, you receive safe harbor protection under IRC 409A. That means if the IRS challenges the FMV, you're protected as long as you acted in good faith on a compliant appraisal.

Without safe harbor, the burden of proof shifts to you to demonstrate the FMV was reasonable. That's a much harder position to defend.

This is why you don't try to do this yourself. You pay for the appraisal, get the safe harbor, and move on.

Budget for It

For a seed-stage company, $1,500-$3,000 for a Carta 409A once or twice per year is noise-level cost relative to your other expenses. Do not skip it, do not DIY it, do not wait until an investor demands it before your Series A closing.

Set a recurring calendar reminder every 12 months (or immediately after each priced round) to initiate the renewal. Your employees' tax exposure depends on it.