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409A Valuation for Startups

If you’re a startup issuing equity compensation (options/NQSO/ISO), you’ll need a 409A for tax purposes

High Quality 409A’s at a Discounted Price

High Quality 409A's at a Discounted Price

Why do I need a 409A valuation?

The IRS requires non-public companies that offer stock based compensation to their employees (i.e. venture capital backed startups) to conduct a 409A valuation of the company’s stock. This determines the fair market value of the company’s stock, and is used to set the strike price for employee options.

Do you really need a 409A valuation?

When you are running a startup, the last thing you want to worry about is what seems like government paperwork. We get that. Unfortunately, the IRS wants your startup to have a 409A valuation so they can make sure that your common stock options have the appropriate strike price. Your employees common stock options are worth something - the 409A helps the IRS compute that worth for tax purposes.

Years ago the board of directors used to just make up a number for the strike price for options. Oftentimes that was usually one penny - because it’s the simplest thing to do, and it’s pretty employee friendly (who doesn’t want a super cheap strike price on their options?!) But the IRS realized that that usually wasn’t representative of the real value or price per share of those options, and so they started mandating that companies opine on the exercise price by doing an academic exercise called the 409A.

When you hire a firm to conduct this work, what you are really paying for is audit protection. You’re making sure that you have an independent, third-party, place a value on your company/value the common stock with the standard documentation that the IRS wants to see. Like it or not, startup founders should always hire a 409A valuation firm so that they can not only get a solid stock exercise price, but also push a lot of the liability of getting that price right to a licensed and insured third party firm.

Do you need a 409A valuation?

We can help you through every step of the 409A process.

What is included in a 409A valuation report?

If you plan to offer equity to employees, you’ll need a 409A valuation. The IRS requires private companies to report how much they pay for stock options when they’re granted or transferred, and improperly valuing stock options can create substantial penalties. The main reason for working with a reputable third-party company is to make sure your 409A is audit-proof. You need to use a valuation firm that has experience producing 409A valuation reports and understand their complexities, so you can be sure your report is accurate and complies with all IRS regulations. Your 409A provider will provide you with a summary of their findings, and detailed breakdowns of the methods used to calculate your startup’s value. Those methods could include things like backsolving, comparing your startup to similar companies, analyzing your income, or totalling your assets. Not every method is appropriate for every startup, so your report will explain the methods used to you (and the IRS).

What should I do if my 409A valuation is too high?

What can you do if your 409A valuation is too high?

There is a very systemic problem in the startup world with valuations coming in too high, and the reason for that is 409A providers are heavily scrutinized by two groups. The first are the valuation accreditation entities. These bodies audit and analyze the work of the valuation providers to make sure they’re doing everything in compliance with the current, accepted methodologies. The second is the IRS. The IRS really wants these valuations to be fair - as in, not too low - because if they’re too low, a bigger percentage of the taxes paid by employees when your startup exit happens come as capital gains taxes, which have a lower tax rate. So the valuation firms are under a lot of pressure, and face possible liability, if they don’t come up with a justifiable number.

Overly high valuations are becoming more and more common, because this pressure from the IRS and accreditation entities ends up pushing the valuation people to be more conservative, and more conservative in valuations means a higher valuation. It means that your company, on paper, even though you probably haven’t accomplished a ton yet because you’re still a startup, is going to have a much, much higher valuation. That hurts your employees, and may make it harder for you to hire the best talent. There are ways to get a better outcome. In particular, so much of a valuation comes down the unique circumstances facing an individual startup. That diligence can influence a number of the equations and assumptions, and can help your company reach a more reasonable outcome. Here are some of the tactics you can use if you feel that your current provider is coming in too high:

  • Ask the provider if they are working off of the preferred share price, especially if you recently closed a venture capital round. The firm may be using the “backsolve method,” which basically means that they are working backward off of the preferred stock price to compute the common stock price. However, the VC investors may have a whole slew of rights and privileges associated with the preferred that the common does not have. Those rights, especially if there is a liquidation preference - make the preferred stock worth a whole lot more than the common shares.
  • Secondly, make sure you give appropriately conservative financials to the valuation firm. The pie in the sky financials that you used to woo the VCs may be too aggressive. If you think that there is any chance that you are unlikely to hit those numbers, then you should offer up a more realistic, conservative case. You can offer projections that are both honest and conservative. One thing to try is to make it take longer for you to hit your big, out-year, $100 million revenue number, for example. We find that this usually takes longer than people project, so you can do this honestly.
  • The third thing you want to do is make sure you pick your comparable companies intelligently. If you are a hardware company, don’t use Google as a comparable. Stay away from the super hot IPOs, as those are usually overly valued.

The right ratio should be around 25 to 35% of common to preferred, meaning if preferred is $1, you want common to be somewhere around 25 cents, 30 cents. If it’s too much higher than that, you have a right to ask your provider for more information.

We can help provide a second opinion if you are worried about too high of a common stock price. Contact us now.

Is a lower 409A better?

A lower valuation helps startup founders attract and retain employees, since it gives the startup’s employees a lower strike price on their options. In theory, this means that employees will have a larger spread between their option strike price and the stock price at an exit, therefore the employee would earn more at the exit.

Do Venture Capitalists Use a 409A Valuation to Value a Startup?

This is a very common question from founders, but basically, the answer is: no, venture capitalists will not use a 409A valuation to value a startup.

Investors will rarely even talk about the 409A price except to approve it in a board meeting. They know that they are buying preferred stock, and not common stock. And preferred has liquidation preferences, redemption provisions, and share class vote, which gives them a really strong ability to control the company. There’s also dividends and many other things in preferred stock that are better terms than common stock.

So VC’s know that they are always going to pay up and pay a higher valuation for the preferred stock and that’s really what the round gets priced on.

Now, if you do have a venture capitalist who’s using a 409A price, you need to get a new venture capitalist, so don’t sign that term sheet. Go find someone else.

But again, VC’s are very savvy. They know that the 409A is not to be used against a founder and that the company effectively wants those prices to be low. So, don’t worry about it.

Get the 409A valuation. Send your conservative financials to your valuation provider. Make sure you pick the comparable companies that are good matches, but also conservative. You may even do a cost to recreate for the valuation provider. That will set you up, you’ll get your accurate price.

And you’re not going to have to worry about your VC negotiating against you using that 409A price.

Get the 409A valuation for your startup!

We can help you through every step of the 409A process.

How often does my startup need a 409A valuation?

Startups should conduct a 409A valuation after every priced round, or at least annually if there has been no recent priced round.

Is a 409A valuation required?

The IRS requires startups to get 409A valuations after every priced round, or annually, which ever is more frequent. A 409A is not required when a company is first formed and founders shares are distributed to founders.

The IRS instituted 409A valuations to address the fact that startup boards were underpricing their stock options. Typically startups would price each share at a penny instead of the fair market value, so management would exorcise their options and pay only a penny a share.

As the stocks increased in value, the management team would only pay the capital gains tax of 20%, rather than the income tax rate, which is closer to 35-40%. The IRS closed that loophole by requiring companies to get a 409A valuation from a third-party accredited valuation provider to avoid underpricing stock options. Now startups need a new 409A valuation every 12 months or each time there is a material change in the company’s valuation.

Answering the specific question we get a lot:

When do You Need a 409a Valuation

A startup needs a 409A valuation after every priced round, or at least annually if there has been no recent priced round. It is also required when there is a material change in the company’s valuation. However, a 409A valuation is not required when a company is first formed and founders shares are distributed to founders.

One tip - if you have recently formed your startup and distributed founders shares, talk to your attorney about getting 83(b) forms sent to the IRS. An 83(b) election is a formal letter that you send into the IRS telling the IRS that you are electing to buy your stock immediately, even if it hasn’t all vested yet, and you are looking to lock in a low tax basis. We have a downloadable 83(b) template that. you can use, or your lawyer can provide one. And you don’t need a valuation firm for this!

Cost to Recreate 409A Valuations Explained

Many valuation providers will use the back-solve method to do a 409A valuation. This means they work backward from your preferred valuation and apply discounts because a preferred stock has liquidation preferences and redemption rights and dividend provisions, and you can control the big decisions with a share class vote. There’s a lot of value in preferred stock versus common stock. Therefore, the common stock trades at a significant discount.

Now, if your company has never done a round with the valuation, hasn’t done one in a very long time, or maybe you’ve done a convertible note or safe note with no implied valuation in the form of a cap, then what do you do?

You can’t use the back-solve method. This is when it comes to the cost to recreate.

The cost to recreate is basically “how much would this company have to spend to rebuild or recreate all the technology that they have built to date?”. It is the closest you can get to a perfect valuation here.

So to build the cost to recreate, you are going to go through all your expenses over time and calculate them. You are essentially capturing the income statement: all the salaries, contractor payments, software tools … anything that went into building your product is going to need to be itemized and submitted to your valuation partner.

Don’t forget the balance sheet. Oftentimes companies will buy big capital expenditures, like big machines or things such as that. That also needs to be included in the cost to recreate. It is important to even go a step farther on a balance sheet item, which is the prepaid expenses. If your company has signed many licenses from software providers or tool providers they should be included, even though some of them are capitalized on the balance sheet.

So once you get all these expenses from the life of the company tabulated, hand those over to your valuation partner. Once you get that valuation back from your partner, you will be able to price all your employees’ stock options. They will be happy, you’ll be happy and you’ll be all set.

Get the 409A valuation for your startup!

Why Should Your 409A Financial Model Be Conservative?

An overpriced 409A valuation could be detrimental to your startup, and the reason for it happening is a common mistake we see founders making. Your 409A is a valuation of your startup that you get from a third-party accredited valuation provider. It sets the strike price for your common stock options for the employees at your company.

There’s a lot wrapped up in the 409A valuation because employees want a fair strike price for their options and you want to have motivated employees. Therefore, you don’t want to overprice it by accident. And presenting an overly ambitious 409A model could lead to a higher strike price.

Don’t Use the Same Financial Model for VC pitches and 409A

Here at Kruze, we see a lot of founders frequently using the same financial model for their 409A as they used for their venture capital pitch deck. This can cause problems because everyone knows (especially every VC) that when founders are giving them a financial model they are doing so in “sales mode.” Their number one aim is to close a round. The projections are designed to help sell how big the business can be, not to super accurately forecast what the near term results will look like. 

Founders want to convince the VC that their company is the greatest startup in the history of mankind, meaning their projections are going to be extremely aggressive. Venture capitals know this. They will actually discount those projections quite heavily most of the time without even telling the founders. Typically they will do that in internal meetings when they are trying to gauge a realistic trajectory for the company.

Develop A Realistic Financial Projection for the 409A

If a founder turns around and gives the exact same aggressive model to the third-party 409A provider, the provider does not have the leeway to discount the “sales mode” projections. Third-party 409A providers have to take what you give them and use that exact financial model when formulating your 409A price. By giving them overly ambitious projections, you will end up with an abnormally high valuation and, subsequently, an overpriced strike price for your employees.

You need to remember you are dealing with a different entity from a venture capital fund. Therefore, you need a different approach:

  • Take your time! 
  • Develop a more conservative version of your financial model.
  • Present your more realistic financial model to your 409A provider.

That will help you get a  409A valuation which is both realistic and ensures your employees are happy with the strike price for common stock.

Flat is the new up for VC valuations for startups

In 2022 we’re facing a pretty big correction in the overall stock market. That means that the comparable company valuations (comps) for venture capital investing are not increasing like they have in the past. These older valuations are making it harder to fundraise. Even if your company has made a lot of progress since the last fundraising round, VC firms have to take a very close look at your valuations based on the current economic environment. So you may not receive the funding you had hoped to get at this point. However, if you need the extra capital, you should probably take the money.

Can 409a Valuations go Down?

Yes, they can. This typically happens if there is a subsequent VC investment at a lower valuation; for example if the Series C stock price is lower than the Series B. However, it is also possible for a startup to lower it’s valuation even if there hasn’t been any outside, professional investment group investing at a lower stock price. For example, Instacart has somewhat famously cut its valuation three times. In March of 2022, Instacart cut it’s valuation by ~40% to $24 billion, then in July 2022 it reduced it to $15 billion, and then in October it reduced it to $13 billion. So it is possible for a startup to get a lower 409a even without a massive, outside VC investment at a lower stock price. However, it is still rather rare.

409A valuations are coming down

In 2022, public technology stocks have corrected significantly, and they’re down about 50%. That, in turn, is beginning to affect the 409A valuations of late-stage companies that aren’t publicly traded yet. Many 409A valuations use a “market approach,” which means the company is compared to several similar companies that are publicly traded. Then some other valuation multiples are applied to reach an enterprise value. So some late-stage companies are bringing their common stock valuations, which are driven by the 409A valuation, down.

Top 409a providers

Kruze clients get thousands of valuations and work with a number of 409a providers. Here are some of the top and most frequently used ones:

  • Carta: Carta is a leading cap table software provider, and some of their more expensive pricing bundles come with a 409a included. This can get pricey, although you do get a number of other cap table features with the increased pricing plan. The cost is usually $120 to $130 more per stakeholder (employee, investor - anyone who owns stock). 
  • Pulley: The second most common cap table provider we see in our client base, Pulley also bundled 409a’s with their more expensive plan, which seems to run our clients about $2,300 more per year than their base plan, so about $3,500. 
  • Eton Venture Services: Eton is a standalone, accredited valuation provider focusing on serving VC-backed startups. A number of Kruze clients have gotten bespoke, yet affordable, valuations from this provider.
  • Economic Partners, part of Ryan Tax: This is a valuation provider, part of a big tax firm, that provides transfer pricing advisory, controversy, and business valuation services. They are competitively priced, and a lot of Kruze clients get well-researched, customized valuations from the. 

What to look for in a 409a valuation provider

Getting a 409A valuation is an essential step in your startup’s life, since it lets you issue stock options. 409As determine the exercise price of your stock options for your startup company. 

And we’ve discovered that a lot of founders may not know this, but you want your 409A done by a certified business valuation professional. You want them to be certified because that accreditation’s really valuable to the appraiser. And just like a CPA or CFA or a law accreditation, certified business valuation providers are going to follow the correct standards so they don’t jeopardize their accreditation.

Use a certified appraiser

The Internal Revenue Service defines a “qualified appraiser” as someone who has earned an appraisal designation from a recognized professional appraiser organization. And valuation providers are actually often audited and heavily scrutinized by the IRS. That means there’s an incentive for them to do a good job, and make sure your valuation is accurate. 

The nightmare 409A valuation scenario is when you’re getting ready for an IPO, and there’s a problem. You’re going through the audit and suddenly the auditors or the bankers say, “Wait a second, this valuation is totally wrong.” It’s way too cheap or it’s way too expensive. You’ll need to restate your financials, which will delay the IPO while that work is done.  

Check your appraiser’s credentials

So always look for a certified business valuation provider when you’re getting your 409A. At Kruze, we partner with certified valuation providers to make sure it’s done correctly. And of course, we provide all the inputs for the 409A, and check it for accuracy. 

But make sure you’re picking someone who’s actually certified. Ask for their accreditation credentials. That’s the best way to make sure you get not just an accurate 409A valuation, but also something that’s defensible in an audit.

If you have any other questions on 409A valuations, startup financials, startup accounting, or taxes, please contact us. You can also follow our YouTube channel and our blog for information about accounting, finance, HR, and taxes for startups!

Interested in a 409A for tax purposes?

We can help you through every step of the process: from understanding key terms to getting the best deal.*

What We Offer



Our valuation partners have the highest certifications and designations and perform over 150 409A valuations per month. They are former Big 4 valuation partners and investment bankers from top firms. No work is done offshore.



We apply valuation methodologies and assumptions that are specifically tailored to your unique situation. The valuation methodology follows AICPA and USAPAP guidelines closely making the reports audit ready.



Valuations are completed 10 Business Days from the date that all company information is submitted. For Kruze clients, that’s easy because we already have your info in our systems.



Upon conclusion of our findings, you will receive a 30+ page in depth 409A report that is readily shareable with your investors and Board.



Unless there are significant changes like a new investment round.



Our economies of scale bring the cost down without compromising quality.

Docs Needed for a 409A Valuation

Lawyer to Provide

  • Cap Table
  • Last round of financing (date, # of shares, price)
  • Applicable ledgers
  • Number of options/warrants including applicable strike prices
  • Number of options to be issued in next 12 months
  • Most recent amended articles of incorporation

CFO/Kruze to Provide

  • Balance Sheet as of valuation date
  • Income Statement as of valuation date
  • Historical financial statements (preferably 1-3 yrs)
  • Financial Model for 18-36 months

Company to Provide

  • Pitch Deck
  • Timing of most likely liquidity event
  • In regards to the Series Seed round you plan on raising this quarter: Will it be convertible debt, preferred stock, or both? Has Company accepted a written offer? Is there a signed term sheet? Do you expect the anticipated financing to be included pro-forma in this 409A valuation?
  • 2-5 Public Comp suggestions
  • Private comp suggestions
  • Name of external legal counsel

Name of External Accounting Firm:

Kruze Consulting, Inc.

409A Valuation PDF

Download 409A Valuation PDF

409A Valuations Pros and Cons


  1. Compliance: A 409A valuation ensures that your company is compliant with IRS regulations regarding stock options and other equity-based compensation. This can help avoid penalties and legal issues down the line.
  2. Attracting talent: You need one to offer stock options to employees! Obviously startups employees in the US expect to get access to stock options.
  3. Investor confidence: VCs/boards are required to approve stock grants, so if you want your board to be confident in you as an operator, you’ll need to conduct a valuation.
  4. Clarity: A 409A valuation provides clarity on the fair market value of your company’s common stock, which can be useful for various purposes, such as financial planning and decision-making. And it’s hard to do this as a founder without outside help.


  1. Cost: Getting a 409A valuation can be expensive, especially for early-stage startups with limited funds.
  2. Time-consuming: The process can be time-consuming, as it requires gathering and providing various financial and business documents to the valuation firm. And as a founder, paperwork just isn’t fun.
  3. Potential impact on option pricing: If the 409A valuation comes back higher than expected, it could result in a higher strike price for stock options, which may be less attractive to employees. This is a huge reason why working with a flexible valuation provider is a good idea, they can work with you to understand the real value of the stock.
  4. Expiration: 409A valuations typically expire after 12 months or after a fundraise, meaning that startups need to get a new valuation annually, which can be costly and time-consuming.


Scott Orn, CFA, is Kruze Consulting’s COO and is a former venture investor.

Scott Orn leverages his extensive venture capital experience from Lighthouse Capital and Hambrecht & Quist. With a track record of over 100 investments ranging from seed to Series A and beyond in startups, including notable deals with Angie’s List and Impossible Foods, Scott brings invaluable insights into financing strategies for emerging companies. His strategic role in scaling Kruze Consulting across major U.S. startup hubs underscores his expertise in guiding startups through complex financial landscapes.

Vanessa Kruze, CPA, is the founder and CEO of Kruze Consulting, and has assisted over 1,000 early-stage companies with their finance and accounting needs.

Vanessa Kruze, a seasoned CPA, has an impressive track record prior to establishing Kruze Consulting. Her experience includes pivotal roles at Deloitte Tax and as a controller for a substantial startup with over 120 employees and $20 million in revenue. Under her leadership, Kruze Consulting has emerged as a distinguished CPA firm, recognized on the Inc 5000 list for five consecutive years, illustrating rapid growth and success in the competitive accounting landscape. Vanessa’s unique approach, combining deep industry knowledge with advanced automation and software solutions, has positioned her firm as a leader in providing comprehensive accounting services to startups across the United States.

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