Not all 409A valuations are created equal

TOGETHER WITH

A 409A, you say? If you’ve been advised to get a 409A valuation for your company, it’s natural not to fully understand what that entails. Fidelity Private Shares created this 409A valuation guide to help keep you prepped.

If you’re reading this, you’re either doing some extensive late-night Googling in a mild panic or trying to understand the ins and outs of a 409A valuation for your startup.

If you’re the latter, Fidelity Private Shares joined Tech Brew to light the way. (And if you’re the former, you’re safe here, friend.)

If you’ve been advised to get a 409A valuation for your company, it’s natural to not fully understand what that entails. According to Fidelity, a 409A valuation sets the fair market value of your company’s common stock—and it plays a bigger role than you might initially think. It helps you stay compliant and avoid costly surprises during audits, fundraising, or exit events.

A little bit about our translators: Fidelity is a trusted equity management platform for growing private companies. From early rounds to IPOs, they bring clarity to complex ownership, connecting cap tables, 409A valuations, data room, and modeling tools for next-round and exit planning.

Fidelity Private Shares created this 409A valuation guide to help keep us all prepped and informed. So without further ado, let’s break down its fine points for founders.

409A: The what

Fidelity notes that founders often confuse a 409A valuation with a fundraising valuation, but they’re not twins. They’re sisters.

A 409A determines the fair market value of common stock for employee equity grants, not the valuation investors assign during a financing round. A defensible 409A is more than a compliance requirement. It supports employee recruitment and retention, builds investor confidence, and helps companies prepare for future diligence, acquisitions, and IPOs.

Fidelity explains that the goal isn’t to get the lowest valuation possible (they’re not playing golf). The goal is to get a valuation that can withstand scrutiny from the IRS, auditors, investors, and future acquirers.

When is a 409A required?

When do you need to take the plunge and acquire a 409A?

There are more than a few details, and they’re pretty specific. Fidelity Private Shares explains that your business should begin the process of obtaining an initial or new 409A valuation:

• before granting your initial common stock options
• following the completion of a venture financing round
• when you’re nearing an IPO, merger, or acquisition
• on an annual basis (12 months) or following a material event, which could include the addition, loss, or modification of a significant contract that materially affects annual recurring revenue (ARR)
• when any substantial acquisition occurs, whether your company is the purchaser or the seller
• when there is receipt of a term sheet from a prospective acquirer
• with the formation of a strategic partnership expected to expand into new markets or enhance profitability
• with regulatory alterations that considerably expand or contract your potential market

You’ll need your company and industry details to obtain your valuation, as well as company financials and fundraising data, all of which Fidelity details in their full guide alongside common valuation methodologies.

409A misconceptions and penalties

Okay, so now we have to talk about the not-so-great parts of a 409A valuation: what happens when you get it wrong.

But don’t take it too hard. Fidelity notes that even experienced founders and operators can get their wires crossed here. Because these misunderstandings can foster mistakes that cost a pretty penny, Fidelity has outlined five of the most common misconceptions:

Misconception 1: A 409A is the same as a company valuation.

The truth: Treating a 409A like a fundraising valuation can actually push founders to strive for a higher number, which works against the goal of setting fair, compliant option strike prices for employees.

Misconception 2: Common stock FMV should always be 10%–20% of preferred stock.

The truth: Relying on a ballpark percentage can set unrealistic expectations and increase the risk of undervaluation, which won’t hold up with auditors or the IRS.

Misconception 3: You can generate a 409A in a few days, tops.

The truth: A true 409A that includes review of your financials, market comparables, and business context typically takes two to four weeks. If you have a quick number that doesn’t stand up to investor or IRS scrutiny, you may end up paying for a costly second valuation—and losing time.

For the rest of the list, check out Fidelity Private Shares’ full guide of misconceptions to help avoid a pain in your wallet.

Ah, sweet clarity

Fidelity said it best: Founders don’t need more complexity. They need clarity.

A 409A is not a one-time event, so it’s best to get it straight from the get-go. As previously noted, companies typically need a new valuation every 12 months or after major business milestones, such as a fundraising round, acquisition activity, or significant revenue changes.

It’s not about speed. It’s about preparedness. And anyone who knows the latter knows the former isn’t the key. Intentionality is.

Take your time, founders. Slow and steady does, in fact, win the race, even in the fast-paced world of finance.

For more, take a look at Fidelity Private Shares’ full guide: So, someone told you to get a 409A valuation…(A guide to getting it right the first time).