Something to readCompensation
409A Valuation
A one-minute glossary entry from a startup law firm on how private companies price stock options
Why it’s worth your time
Orrick's glossary entry explains, in one paragraph, the outside appraisal that US private companies can use to set the exercise price on stock options. If you hold private-company options or are weighing an offer with them, it tends to answer a question that's awkward to ask out loud: where that price came from. It also explains why the price on a later grant can be different.
How a 409A valuation sets your strike price
The essay · 1 min · Free
How to get it
Opens their site. We don’t copy it here; we’d rather they get the read.
- Read the entry.
It's a single paragraph on Orrick's Tech Studio glossary. Notice the two limits at the end on how long a valuation stays valid.
- Find out when your company's last 409A was done.
Check your equity portal, or ask the person in finance or HR who handles stock grants, for the date of the most recent 409A valuation and the fair market value per share it set. Write both next to the strike price on your own grant.
Good moments for this: before a new option grant is approvedwhen a funding round closeswhen a later grant comes in at a different price
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Every workplace is different. Here’s what to think about before you start, and what might get in the way.
Things to think about
Its example of a valuation going stale is a new term sheet from investors. Once a company is public, the market price of its stock generally sets the price of new options, and the 409A question mostly falls away.
A strike price set this way tends to be the output of a process rather than a number anyone negotiates, which can make it a frustrating thing to push on in an offer conversation.
What might make this harder
Ask whether your grant will be priced on the current valuation or a new one, so the number in your agreement doesn't come as a surprise.
Questions people ask
What is a 409A valuation?
An appraisal of what a private company's stock is worth, usually done by a qualified valuation firm. Companies use it to set the exercise price of employee stock options at fair market value, so the options don't trigger tax and penalties ahead of time under the federal rules on deferred pay that give the valuation its name.
How often does a company need a new 409A valuation?
Orrick says a valuation is good for at most twelve months, and for less if the board has reason to think it's out of date, for example after receiving an investment offer at a very different valuation.
Why is my strike price so much lower than what investors paid?
A 409A usually values the common stock employees receive, while investors typically buy preferred stock, which carries extra rights such as being paid back first if the company is sold. Those rights tend to make preferred shares worth more, so a sizable gap between the two prices is common.
What it says, and how it holds up
Section 409A of the US tax code governs pay that's earned now and received later, and a startup stock option can count as that kind of pay. Orrick's entry explains what that means for the price you'd pay to buy your shares. If an option's exercise price is set below what the stock is worth, it can bring an early tax bill with penalties attached, so companies hire an outside firm to put a fair market value on the stock and price options at or above it. The appraisal is there to keep your grant clear of an early tax bill. Orrick is a large law firm with a startup practice, and Tech Studio is its free resource site for founders, which is why the entry reads as much like a checklist item for a company as an explainer for you.
The twelve-month limit in the entry tracks a safe harbor in the Treasury regulations under Section 409A: a valuation by a qualified independent appraiser, no more than a year old, is generally presumed reasonable. The penalties for getting it wrong can be steep, including an extra 20 percent federal tax on the employee, which goes some way to explaining why companies treat the schedule seriously. If your real question is what your options might be worth one day, a 409A is the wrong number to lean on: it estimates today's value for tax purposes, and appraisers often land on the cautious side. The entry describes US federal tax rules only, and other countries price employee options in their own ways. This explains how things usually work; it isn't financial, tax or legal advice for your situation.
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Picked by Truest and described in our own words. The original belongs to its creator. Last updated October 9, 2026. We sell a career membership; where that’s relevant above, we say so.