Do I Need a 409A Valuation Before Issuing Stock Options?

Q: When Exactly Do You Need a 409A?

You need a 409A valuation in place before the board approves any option grant. The valuation date must be on or before the grant date. The typical sequence is: Obtain 409A valuation (takes 5–14 business days) Board approves option grant at the 409A FMV as the exercise price Issue options to employees A 409A valuation is valid for 12 months, or until a material event occurs — whichever comes first.

Yes. Any US private company that grants stock options to employees must obtain an independent 409A valuation before setting the exercise price. Issuing options without a valid 409A exposes both the company and the employee to immediate income tax plus a 20% additional federal tax under IRC Section 409A.

Published August 13, 2026

Updated August 15, 2026

3 min read

Key Takeaways

You must obtain a 409A valuation before granting any stock options to US employees

Options granted without a 409A valuation are considered discounted options under IRS rules

Employees who receive discounted options owe income tax plus a 20% additional tax at vesting

A 409A valuation provides safe harbor protection for 12 months from the valuation date

You need a new 409A after any material event: fundraising round, acquisition offer, or significant business change

Pre-revenue companies still need a 409A — the valuation will be low but it must exist

The cost of a 409A valuation ($1,099–$3,499) is far less than the IRS penalties for non-compliance

The Short Answer: Yes, Before Every Option Grant

If your US company plans to grant stock options, you must have a current 409A valuation in place before you set the exercise price. This is not optional. It is a requirement under IRC Section 409A, enacted in 2004.

Without a valid 409A valuation, any options you grant are treated as "discounted options" by the IRS — regardless of what you intended. The consequences fall on the employee, not just the company.

What Happens If You Issue Options Without a 409A?

If you grant options without a valid 409A valuation, the IRS treats the spread between the exercise price and the fair market value as immediate income at vesting. The employee owes:

Ordinary income tax on the spread at the time of vesting (not exercise)
An additional 20% additional federal tax under §409A
Interest on the underpayment from the date of vesting

In California, there is an additional 5% state additional tax on top of the federal additional tax — meaning California employees could face a combined 25% additional tax (20% federal plus 5% California) plus income tax and premium interest, once those options vest.

When Exactly Do You Need a 409A?

You need a 409A valuation in place before the board approves any option grant. The valuation date must be on or before the grant date. The typical sequence is:

Obtain 409A valuation (takes 5–14 business days)
Board approves option grant at the 409A FMV as the exercise price
Issue options to employees

A 409A valuation is valid for 12 months, or until a material event occurs — whichever comes first.

Material Events That Require a New 409A

Even if your current 409A is less than 12 months old, you need a new one after any of these:

Closing a new funding round (priced or SAFE)
Receiving a bona fide acquisition offer
A significant change in the company's financial performance (positive or negative)
A change in the company's primary business
Completing an IPO

What About Pre-Revenue Companies?

Yes, pre-revenue companies still need a 409A. The valuation will reflect your early stage — typically a very low FMV per share — but that is the correct outcome. A low 409A FMV is not a problem; it means employees get options with a low exercise price, which is valuable to them.

The IRS does not care about the size of your company. It cares that you followed the process.

How Much Does a 409A Cost vs the Risk?

Scenario	Cost
409A valuation (Pre-Seed)	$1,099
409A valuation (Seed)	$1,299
IRS additional tax per affected employee (on $50K spread)	$10,000+
Back taxes + interest + penalties across 10 employees	$100,000+
Legal fees to resolve IRS examination	$25,000+

The cost of a 409A is a rounding error compared to the cost of getting it wrong.