When you’re running a startup, you're going to run into a lot of concepts that feel foreign at first but are essential for growth. One of those is the 409A valuation. If you’ve heard of it but never really paid attention, let us break it down for you—because sooner or later, you’re going to need it.
What Is a 409A Valuation?
A 409A valuation is a third-party assessment of your company's fair market value (FMV). It comes from a section of the IRS code and is specifically used to determine the price of common stock options for employees. In other words, it’s how you figure out how much you can grant stock options to employees for without getting into trouble with the IRS.
The 409A valuation determines the fair market value of your company’s common stock, which is typically lower than the preferred stock valuation that investors pay. Why? Because common stock comes with fewer rights than preferred stock, making it less valuable. From the IRS’s point of view, this number needs to be official, defensible, and calculated by an independent party with no bias.
When Do You Need a 409A Valuation?
There are a few scenarios when a startup will need a 409A valuation:
Issuing stock options: You can’t just randomly decide how much to price those stock options for employees. That’s where the 409A valuation comes in. Without it, the IRS could decide you underpriced the options, resulting in penalties and extra taxes for your employees.
Major funding events: After you raise a round, the price of your preferred shares will likely change, which means your common stock price will too. You'll need to update the valuation after significant events like this.
Every 12 months: Even if nothing significant happens, you’ll still need a new valuation every year to stay compliant.
Costs and Timeline: What to Expect
If you're an early-stage startup, you’re probably wondering what this is going to cost you. Typically, a 409A valuation ranges from $1,000 to $5,000, depending on how complex your business is. Startups with simpler structures will find themselves on the lower end, while larger companies with multiple revenue streams will pay more.
In terms of time, expect it to take around 2-3 weeks. It’s not as drawn out as raising a round, but the firm doing the valuation needs time to review your financials, cap table, and market trends before they come back with a number that satisfies IRS standards.
How Is This Different From Investor Valuations?
Now, you might be thinking, how is this different from the valuation I just raised money at? The answer lies in the type of stock.
When an investor puts money into your company, they’re buying preferred stock, which comes with all sorts of perks—like liquidation preferences, voting rights, and sometimes even dividends. This makes preferred stock worth more because of the extra rights it gives investors.
Common stock, which employees receive through stock options, doesn’t have those perks. It’s riskier for them since they get paid out after preferred shareholders in the event of a liquidation. Therefore, common stock is usually valued lower to reflect this higher risk.
How We at Redbud VC Help Navigate 409A Valuations
At Redbud VC, we understand that the 409A process can be overwhelming, especially for early-stage founders. That’s why we work to support our portfolio companies in navigating this process smoothly and efficiently.
Through our partnership with AngelList, we offer an initial 409A valuation at no cost to our founders. This helps them avoid the initial friction that comes with securing a valuation, so they can focus on what really matters—building their product and scaling the company.
By taking this step off your plate, we aim to make the early stages of your company’s growth smoother. We know that valuations, whether 409A or investor-driven, are vital to managing equity and compensation properly. Offering this service is part of how we invest not just financial capital but also operational support to help you succeed.
Why 409A Valuation for a Startup Matters
409A valuations are a critical but often misunderstood part of building a startup. They’re required to issue stock options, necessary after big funding rounds, and need to be updated annually. It’s just one of those things you need to stay compliant, keep employees happy, and avoid any unwanted attention from the IRS.
At Redbud VC, we’ve got your back. Whether it's helping you through your first 409A or offering insight into managing equity as you scale, we’re here to make sure you can focus on building a great business. Let us handle the 409A, and you can get back to what you do best—innovating, growing, and creating impact.
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