A 409A valuation is an independent appraisal of a private company’s common stock, named for the tax-code section that punishes options granted below fair market value. Its practical job is narrow: set a defensible strike price for new option grants. Around that narrow job has grown a fog of misunderstanding worth clearing.
What the appraiser actually does
Most 409A work starts from the company’s own financing: if investors just paid a known price for preferred stock, the appraiser works backward from that transaction — allocating the implied company value across the share classes and their different rights, then applying a discount for the common stock’s illiquidity. Between rounds, income and market-comparable methods carry more weight. The result is an opinion of what a willing buyer would pay for common shares today, restrictions included — which is why it sits, often dramatically, below the preferred headline (the three-numbers problem).
When it changes
Valuations are refreshed at least annually and after material events — a new round, a big contract, a tender at an observable price. That last one matters: consistent secondary trading at a level above the current 409A tends to pull future appraisals — and future strike prices — upward. Liquidity leaves fingerprints.
What it means for an option holder
Three things, exactly. Your strike price on new grants — lower 409A, cheaper options, more built-in spread. Your tax exposure at exercise — the spread between strike and current 409A drives the calculation for several tax regimes, so exercising while the 409A is low can matter enormously (a conversation for a tax professional, before you exercise). And a floor-ish reference for negotiations — a secondary offer far below the current 409A deserves questions.
What it is not
It is not a prediction, not a guarantee, not the price a buyer must pay, and not the company’s “real” value — it is a tax-purpose appraisal of one share class at one moment, built on stated assumptions. Read it the way the appraiser wrote it: carefully, and for its purpose.
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