What does a 409A valuation cost?

The cost of a 409A valuation typically ranges from $1,000 to $5,000, but it depends on the size and complexity of your startup. Large corporations could spend as much as $10,000 with more expensive providers.

Let’s explore the pricing you can expect at each funding stage, other factors that affect your valuation costs, and what else you need to know about 409A valuations.

Typical 409A valuation costs

The cost of a 409A valuation can vary widely depending on several different factors (which we’ll discuss more later), but the primary variable is typically your company’s stage of growth, such as seed or Series C.

Generally, early-stage startups with relatively simple financials and cap tables should be on the low end of the range, often between $1,000 and $3,000. 

As you complete additional funding rounds, expand your team, or become more financially complex, the cost increases steadily from there.

Here’s what you can typically expect to pay for a 409A valuation based on your startup stage:

Keep in mind that these ranges are only estimates, and actual rates can vary significantly. As with any large purchase, it’s best to shop around with multiple providers and compare quotes to determine what you realistically have to pay.

409A valuation cost factors

Your startup’s funding stage is the biggest driver of 409A valuation costs, but several other factors can impact the price you pay. Here are some of the most notable ones:

• Stage of company: Early-stage startups tend to have straightforward finances and equity structures, which makes valuations cheaper. Later-stage companies are usually more sophisticated, making venture valuations more expensive.
• Size of company: Smaller companies have fewer moving parts by definition, often making them easier and less costly to evaluate. As businesses grow in size, they also tend to grow in complexity, leading to higher valuation costs.
• Equity structure: The more challenging it is to navigate your cap table, the more expensive 409A valuations become. For example, raising funds with SAFEs, issuing multiple stock classes, and providing equity compensation can all increase your cost.
• Turnaround time: Vendors often charge a premium if you need to expedite your 409A valuation, such as for a rapidly approaching board meeting.
• Valuation provider: Top-tier appraisers and those with specialized industry experience often charge more than smaller or less experienced vendors.

Can I use capitalization table software to do it for “free”?

Some cap table management platforms offer “free” 409A valuations as part of their software packages. With traditional valuation services costing thousands of dollars, that can sound like an attractive option, particularly if your cash runway is tight.

However, many of these “free” valuations are largely automated, relying on templates and generic assumptions to arrive at their valuation amounts. If there is a human overseeing the process, they’re usually relatively junior professionals.

As a result, “free” 409A valuations are unlikely to have an accurate result, especially as your business grows in size and complexity. And unfortunately, using an inaccurate valuation may be worse than not having one at all.

If you don’t have an accurate valuation, you risk paying far more on the back end than you ever would for a proper valuation, whether through turnover costs, deferred compensation lawsuits, or Internal Revenue Service (IRS) penalties.

For example, if your valuation results in an inflated strike price for your employee stock options, your equity compensation will become less appealing. Worst case, you may struggle to attract or retain top talent.

Alternatively, if the IRS challenges your company’s valuation for being too low, your employees could end up facing significant tax penalties, causing them to take legal action against you for your negligence.

Can I do a 409A valuation myself?

Internal Revenue Code (IRC) section 409A doesn’t state you can’t do your own venture valuation, but it might as well. No investor or IRS auditor will take a self-conducted assessment seriously, as it’s impossible to be objective about your own company.

Even if you could manage to be objective, it’s unlikely that you’ll have the expertise necessary to conduct a sufficiently accurate 409A valuation, especially once your business develops a more complicated equity structure.

As a result, it’s best to hire an independent 409A valuation firm that you can be confident will qualify you for 409A safe harbor protection.

What is a 409A safe harbor?

The 409A safe harbor is a legal protection that helps shield you and your employees in case of an IRS audit. To qualify, you generally must use one of three methods to arrive at your valuation (we’ll discuss these more in the next section). 

By qualifying for the safe harbor, you gain a “presumption of reasonableness” for your stock option pricing. More specifically, this means that the burden of proof during any potential audit shifts from you to the IRS.

If the IRS ever questions your valuation, it must prove that the valuation method or its application was grossly unreasonable to impose IRS penalties on your employees. Meanwhile, not qualifying for safe harbor makes it your job to prove the opposite.

This doesn’t necessarily mean that qualifying for 409A safe harbor means your valuation can’t be overturned, but it’s the single most powerful step you can take to protect yourself and your employees from that risk. 

Without it, you’re effectively gambling with your employees’ money and your company’s reputation.

Common 409A valuation methodologies

For your 409A valuation to qualify for the IRS safe harbor, you generally must use one of three established methodologies. Each of the following is detailed in IRC 409A:

• Independent appraisal method: This is the most common, accessible, and defensible approach. It involves hiring a qualified, independent third party to perform a formal valuation. Done properly, the valuation is good for 12 months or until your company undergoes a material change, such as a new funding round.
• Formula-based method: This is a rarely-used approach that involves calculating stock value with a pre-established formula. Its main drawback is that it forces you to use the same valuation amount for all transactions involving the stock class, not just for employee stock option grants.
• Illiquid startup method: This involves having a valuation professional with significant knowledge, experience, education, or training prepare a written report in good faith. It’s for private companies with no change of control in the next 90 days or IPO within the next 180 days.

Whichever valuation methodology you prefer, your appraiser will usually calculate the amount with an industry-standard technique, such as the income approach, market approach, or asset approach.

Once they determine your company’s overall value, your appraiser allocates it across your share classes to determine your stock option stock prices.

What is included in a 409A report?

A 409A valuation report should include all the documentation necessary to explain how the issuer determined your company’s fair market value (FMV) for the purpose of setting reasonable stock option strike prices. For example, that typically includes:

• A summary of your company’s background, industry, and financial position
• Detailed analyses of your capital structure and fundraising activities
• An explanation of the valuation methods used and why they were chosen
• A clear walkthrough of the assumptions made and calculations performed
• Supporting data, like financial statements, cap table details, and comparable companies

To qualify for safe harbor protections under the independent appraisal method, the report must also include a statement of independence and a signature from a qualified valuation provider. Otherwise, it may not hold up under IRS scrutiny.

How long does a 409A valuation take?

A 409A valuation typically takes between two weeks and a month to complete. However, the actual time can vary significantly depending on the size and complexity of your business, the provider you use, and the time spent on initial data collection.

For example, pre seed valuations for startups with straightforward finances and cap tables may take as little as a week. Meanwhile, valuations for companies that have gone through several priced rounds might need more than a month.

If you need your valuation by a specific date, make sure to mention the deadline to your service provider. Many will be willing to offer expedited valuation timelines for an additional fee.

What is the difference between 409A valuation and IPO price?

A 409A valuation determines the FMV of your company’s common shares for tax-compliance purposes. It’s meant to promote fair equity based compensation and inform your minimum employee stock option strike price. 

Meanwhile, an IPO price is the initial price at which you offer company shares to investors when you go public. 

In addition to your business’ fundamentals, market conditions and investor sentiment can influence the amount. As a result, it’s a much more subjective and volatile amount.

Note that your 409A valuation is also separate from your post money valuation, which reflects the enterprise value of all your company’s shares—including preferred stock—after the completion of a funding round.

409A penalties

Failing to comply with 409A requirements can result in severe financial consequences for your employees. If the IRS determines you issued stock options with a below-FMV exercise price, the recipients may be subject to:

• Immediate income tax on the value of the stock option when vested
• A federal tax penalty equal to 20% of the stock option value
• Extra penalties in certain states, such as a 5% penalty in California
• Potential interest on tax amounts they should have paid sooner

Such large, unexpected tax bills can be devastating for employees, potentially costing them thousands or even tens of thousands of dollars. No immediate burden falls on your company, but that doesn’t mean you get off scot-free.

In practice, you may suffer significant reputational damage, making it more challenging for you to attract and retain talent. Additionally, 409A non-compliance can be a major red flag to investors, complicating future fundraising rounds and exit attempts.

Finding a 409A valuation provider

Choosing the right provider is essential for receiving an accurate, defensible valuation without breaking the bank. Here’s a step-by-step guide you can follow to find a service that meets your needs:

1. List qualified potentials: Start by identifying firms that have a strong track record in 409A valuations. Ideally, they should be familiar with startups that share your funding stage, industry, or business model.
2. Verify independence: Make sure your provider is completely unaffiliated with your company to ensure you qualify for IRS safe harbor treatment under the independent appraisal methodology.
3. Basic due diligence: Visit each provider’s websites to review the details of their services, such as who exactly completes the reports and what kind of post-delivery support they offer. If possible, read through customer reviews or get recommendations from your network and legal counsel to inform your choices. 
4. Compare pricing: Do your best to minimize your costs, but don’t default to the cheapest option. Remember, a generic or inaccurate valuation will cost you far more on the back end than you’ll ever pay upfront for proper service.
5. Leverage free consults: Meet with a short-list of providers so you can ask for more details about their processes, turnaround times, and qualifications. Stay away from those unwilling to be transparent.

Some of the best banks for startups also offer 409A valuations. If you already have a good relationship with one, consider working with them before looking elsewhere.

Hire Zeni to do your 409A report

Zeni is a full-service financial management company, providing bookkeeping, tax, payroll, and fractional CFO services. We specialize in serving startups, with a proven track record across various industries and funding stages.

If you plan to grant employee stock options, we can prepare your books for the 409A valuation process, issue a qualifying report, and provide ongoing tax support in case of an IRS audit. Schedule a free consultation with our finance pros to get started today.