Independent 409A valuation, clearly documented

Section 409A of the Internal Revenue Code governs nonqualified deferred compensation. Private companies commonly obtain an independent valuation when setting the exercise price of compensatory stock options. The relevant conclusion is generally the fair market value of common stock—not the most recent preferred financing price.

Preferred shares may carry liquidation preferences, conversion rights, participation features, or other economics that distinguish them from common stock. The analysis therefore considers both the company-level value and the allocation of that value across the capital structure.

The information request is tailored to the company and valuation date. Complete, internally consistent source information makes review more efficient and helps distinguish current facts from assumptions.

• Current capitalization table and security terms
• Historical financial statements and management forecasts
• Recent financings, secondary transactions, offers, or strategic developments
• Prior valuations and material changes since the last valuation date
• Company background, market context, and board-approved information where available

The valuation method should fit the company’s stage and available evidence. The allocation method—such as an option pricing method, probability-weighted expected return method, current value method, or a hybrid—should reflect the capital structure and realistic paths to liquidity.

A discount for lack of marketability may be considered for a nonmarketable interest. It should be supported by the facts and applied consistently with the selected allocation framework, not inserted as an unexplained convention.

A valuation is tied to its effective date. Companies often revisit a 409A analysis at least every 12 months and sooner after a material event, such as a financing, acquisition, significant secondary transaction, major forecast change, or other development that could affect value.

No valuation provider can guarantee tax treatment, audit acceptance, or safe-harbor status in every circumstance. Companies should coordinate the valuation with qualified tax and legal advisers and disclose complete, accurate information for the engagement.