Founders usually ask about a 409A valuation at one of two moments: when they are about to hire their first employee with equity, or when an auditor or investor flags that theirs has expired. Both are real triggers — but neither captures the full picture. A 409A is not a one-time box to tick. It has a defined shelf life and a defined set of events that end it early. Getting the timing wrong is not a paperwork slip; it exposes the people you are trying to reward to severe tax penalties.
This guide answers two precise questions: when do you first need a 409A valuation, and how often do you have to refresh it after that.
What a 409A actually does
A 409A valuation establishes the fair market value (FMV) of your company's common stock under IRC Section 409A. That FMV sets the minimum legal strike price for any stock options you grant. Options have to be granted at or above FMV. Grant them below FMV and you have, in the eyes of the IRS, handed employees discounted equity — which Section 409A treats as deferred compensation and penalises hard.
The reason to use a qualified independent appraiser is the safe harbor. A valuation performed by such an appraiser is presumed reasonable; if the IRS ever disputes it, the burden is on them to prove it wrong. (Other safe harbors exist — an illiquid-startup route and a binding-formula route — but the independent appraisal is the standard, and the cleanest to defend.) Without a valid 409A, you have no safe harbor and no defensible strike price.
When you need your first 409A
You need a 409A valuation before you issue your first stock option or equity grant. Concretely, that means before any of the following:
- You are about to make your first equity-carrying hire. The moment you want to put options in an offer letter, you need a strike price, and a defensible strike price needs a 409A.
- You are setting up an option pool. A pool with no valuation behind it cannot issue compliant grants. The valuation should be in place before the first grant out of it.
- You have just closed a priced funding round. A priced round nearly always means you will be granting equity soon, and the round itself is a material event (more on that below). Most companies get their first 409A right around their seed or Series A round for exactly this reason.
- An auditor or investor asks for one. If anyone doing diligence on your company asks to see your 409A and you do not have one, you need one — and probably should have had it already.
What you do not need a 409A for: issuing founder shares at incorporation (typically issued at par, well before there is meaningful value), or raising on SAFEs or convertible notes alone with no employee option grants yet. The trigger is granting options to service providers, not raising money. That said, the round and the first grant usually follow each other closely, so in practice most founders need their first 409A within months of their first institutional money.
The refresh rule: 12 months or a material event
Here is the rule that catches founders out. A 409A valuation is valid for 12 months OR until a material event occurs — whichever comes first.
That is an "or", not an "and". Two things can end your valuation:
- Time. Even if nothing changes in your business, the valuation expires 12 months after its valuation date. After that, the safe harbor lapses and any new grants need a fresh valuation.
- A material event. If something happens that could meaningfully change the value of your common stock, the valuation is stale immediately — even if it was issued last month. You cannot rely on a recent 409A through a material event.
So the practical answer to "how often do I refresh?" is: at least once a year, and again every time a material event happens. A company that raises a round, hits a major milestone, and approaches an exit could legitimately need three or four 409As in eighteen months. That is normal, not excessive.
What counts as a material event
A material event is anything that could significantly affect the value of your company. The most common one — by far — is a new priced funding round. When investors buy preferred stock at a fresh valuation, that price is the strongest possible evidence of current value, and your old 409A no longer reflects reality.
| Event | Material? | Notes |
|---|---|---|
| New priced equity round (seed, Series A, B...) | Yes — almost always | The clearest material event; refresh before granting more options |
| SAFE or convertible note round | Sometimes | Less definitive than a priced round; judgement applies, but a large note round can be material |
| Signing a term sheet or LOI for acquisition | Yes | An exit price is direct evidence of value |
| A major commercial milestone | Often | Landing a transformational customer, regulatory approval, a large revenue jump |
| A significant pivot or downturn | Yes | Value can move down as well as up; a stale high valuation hurts employees on new grants |
| Secondary share sales at a notable price | Often | A real transaction in your stock is evidence of value |
| Routine hiring, normal monthly growth | No | Ordinary-course activity; the 12-month clock is what governs |
If you are unsure whether something is material, treat it as material. The cost of an extra valuation is a known, modest number; the cost of granting options on a stale one is not.
What happens if you skip or stale it
This is why the timing matters. If you grant options without a valid 409A — or on one that has expired or been overtaken by a material event — and the IRS later determines the strike price was below FMV, the consequences land on your employees, not the company:
- Immediate income tax on the option value as it vests — not at exercise, but at vesting, before the employee has seen a cent of cash.
- An additional 20% federal penalty tax on top of ordinary income tax.
- Interest charges back-dated to vesting.
- Several states pile on their own additional penalties.
An employee can face a five- or six-figure tax bill on equity they have not been able to sell. It is a morale catastrophe and an avoidable one. It also surfaces in diligence: an expired or missing 409A is a routine red flag in fundraising and M&A, and one of the cap-table issues we flag in our cap table management guide.
The fix is simple discipline: get the first valuation before the first grant, diary the 12-month expiry, and refresh on every material event. For what each engagement involves, see the 409A valuation process step by step; for how cost varies, see 409A valuation cost in 2026; and for stage-by-stage timing, 409A valuation by funding stage.
Not sure if yours is still valid?
If you cannot quickly answer "when was our 409A dated, and has anything material happened since," that is exactly the question worth a short call. Tell me your last valuation date and what has changed in your business, and I will tell you honestly whether you are covered or need a refresh.
Send your details — a 15-minute check before you make your next grant.