409A Valuations
A 409A valuation determines the fair market value of your company’s stock, allowing you to issue equity-based compensation to employees like stock options, restricted shares, and other share-based equity instruments at a compliant and defensible value. For any company issuing equity-based compensation, especially those with complex capital structures and various classes of stock and equity awards, getting this right is critical.
Whether you’re issuing your first options or navigating ongoing compliance, a reliable 409A valuation ensures your equity compensation stays aligned with IRS standards.
The Purpose
Private companies issuing equity-based compensation need a 409A valuation to comply with IRS safe harbor provisions under Section 409A of the Internal Revenue Code. An accurate, IRS-compliant valuation ensures equity is issued at fair market value, helping you avoid steep tax penalties, including a 20% federal income tax penalty and potential state-level penalties.
But a 409A valuation is more than a compliance checkbox. A defensible valuation protects your company from costly audit risk, supports your strategic goals, and helps you attract and retain top talent.
For a deeper look into the 409A valuation, check out our comprehensive guide here.
The Redwood Advantage
Avoid automated valuation providers that prioritize growth over accuracy and service—putting your company at risk of tax penalties, audit challenges, and misvaluations. At Redwood, we deliver accurate, timely, and audit-ready 409A valuations tailored to your company’s unique risk profile and development stage. Our sole focus on valuation means you get specialized expertise, rigorous standards, and technical precision. Our team brings deep experience across venture capital, startups, and corporate finance, and has completed thousands of 409A valuations that consistently stand up to IRS scrutiny. We take a holistic approach, combining independent analysis with exceptional client service to deliver valuations you can trust—today and as your business evolves.
Built for complexity and trusted for clarity, Redwood delivers valuation insights that empower confident decision-making and drive growth.
FAQ
We’ve helped hundreds of startups and established businesses complete valuations. Here are some common questions.
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A 409A valuation report remains valid for up to 12 months from the valuation date or until a significant event – such as a new funding round.
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A draft 409A valuation is typically ready for review within 3 to 4 weeks, but we have expedited options for timelines as short as one week. For later-stage companies, the process might take a bit longer.
Upon receiving your report, you can assess the valuation for its accuracy. We are happy to connect with you and your auditor at any point throughout the process.
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Companies issuing stock options or other equity compensation, including most startups, need a 409A valuation.
When granting stock options to employees, determining the fair market value of the stock is necessary to set the exercise price for those options. For public companies, the exercise price is the stock price on the date of grant. For private companies, the easiest way to grant options to your employees on a tax-free basis is through an independent 409A valuation.
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Non-compliance could lead to harsh financial implications for your employees. If the IRS determines your 409A valuation does not meet standards, all the shares granted to employees at that value could be subject to gross income tax. The IRS can also impose a penalty of up to 20% on stock options in addition to back-tax.
Although enforcement cases are uncommon, the IRS has successfully prosecuted cases in the past (see Credit Karma). 409A compliance is a part of due diligence for every investor and potential buyer. The absence of a compliant report can hinder or deter future investment.
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The 409A valuation process broadly involves three steps:
Estimate company value: For high-growth, cash burning tech companies, the market approach is commonly used. In the absence of a recent round of funding, you and/or your valuation firm identify public companies in your sector and applies the selected valuation multiples to the relevant company metrics.
Ascertain the value of the common stock: The next step involves allocating the company value to the different share classes. This can be complex due to the differing economic rights of different shares (such as preferred shares).
Apply a Discount for Lack of Marketability (DLOM): Since the company's shares aren't tradable if it's private, your auditor applies a discount to your share price due to the absence of a liquid market for these shares.
Get Started & Grow
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