Guide
409A valuation report example: what it contains, and why no calculator
Updated
People searching for a 409A example or 409A calculator usually want a sense of the number before paying for it. The regulation is why that is harder than it sounds.
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How this calculator works
- Why the count matters more than the price. For stock not readily tradable on an established securities market, the regulation says fair market value means "a value determined by the reasonable application of a reasonable valuation method".
- Using a previously calculated value is not reasonable if it fails to reflect later information that may materially affect value.
- Nor is it reasonable if "the value was calculated with respect to a date that is more than 12 months earlier than the date for which the valuation is being used" (Treas. Reg. 1.409A-1(b)(5)(iv)(B)(1)). That is where the annual refresh and the event-driven refresh both come from.
- The independent appraisal safe harbor. The regulation presumes a valuation is reasonable where it is "determined by an independent appraisal that meets the requirements of section 401(a)(28)(C) and the regulations as of a date that is no more than 12 months before the relevant transaction to which the valuation is applied".
- The IRS may rebut that presumption only by showing the method or its application was "grossly unreasonable" (Treas. Reg. 1.409A-1(b)(5)(iv)(B)(2)(i)).
- Prices are market prices, not published rates. No government body sets or publishes a 409A fee. The $2,000 default is a round assumption inside the range of the list prices providers publish today, and it is not a statistic. Ask for a written quote and use that instead: the calculator is only as good as the number you put in.
- The count is an upper bound. Adding one valuation per year and one per material event slightly over-counts, because a valuation performed after an event also restarts the 12-month window. Treat the figure as a budgeting ceiling rather than a schedule, and take the schedule from counsel.
- Not included. Cap table software, ASC 718 stock compensation expense reporting, audit support, secondary or tender offer valuations, QSBS attestations and state filings. Several providers bundle some of these with the 409A, which is exactly why comparing headline prices between them is misleading.
- What is at stake if it goes wrong. Where a nonqualified deferred compensation plan fails section 409A, the deferred compensation is included in gross income. The tax is increased by premium interest plus "an amount equal to 20 percent of the compensation which is required to be included in gross income" (26 U.S.C. 409A(a)(1)(B)).
- The cost falls on the option holder, which is why underpricing a strike price is an employee problem before it is a company problem.
- This is general information about a US federal tax rule, not tax or legal advice, and it does not address state law. Talk to your counsel and your accountant before you rely on any of it.
The regulation asks for a method, not a formula
For stock that is not readily tradable, fair market value means "a value determined by the reasonable application of a reasonable valuation method" (26 CFR 1.409A-1). There is no prescribed equation, no published multiple, and no rate table. What the regulation supplies is a standard of reasonableness, which is exactly what a calculator cannot encode.
What a 409A appraisal works through
A report is a chain of decisions, each of which a reviewer can disagree with. That chain is the deliverable; the number at the end is a consequence of it.
- Enterprise value
- Usually approached by more than one route: a market approach against comparable companies or transactions, an income approach discounting projections, and for early-stage companies a value implied by the most recent financing.
- Allocation across the cap table
- The step founders underestimate. Preferred stock carries liquidation preferences and sometimes participation, so common stock is not simply enterprise value divided by shares. Option pricing or scenario-based methods allocate value between classes.
- Discount for lack of marketability
- Common stock in a private company cannot be sold freely, and the appraisal reduces the per-share figure to reflect that. The size of the discount is a judgement supported by evidence, not a constant.
- The written record
- For the start-up route the regulation expects a valuation "made reasonably and in good faith and evidenced by a written report". The report is part of what the presumption depends on, not documentation of it.
Why the common-to-preferred ratio is not a rule of thumb
The often-repeated idea that common stock is worth a fixed fraction of the latest preferred price is a description of some outcomes, not a method.
The gap is produced by the preference stack, the probability and timing of an exit, and the marketability discount. All of these differ between two companies that raised at the same price on the same day.
Applying a remembered ratio to your own cap table produces a number with nothing behind it, which is the one thing the regulation's standard of reasonableness rules out.
Why this site publishes no 409A calculator
We could put three inputs in a box and return a per-share figure. It would rank, and it would be worse than useless. The output would carry none of the reasoning the presumption actually rests on, and could not be shown to anybody.
The honest version of that tool is the list above: know which allocation method your appraiser used, which comparables they chose, what discount they applied and why. Those four answers tell you more about whether a valuation will hold than any figure a calculator could return.
If what you need is a budget rather than a valuation, the cost of the engagement is a separate and answerable question. It is the one this site's main page is about.