globe Andersen Global Andersen Consulting Andersen Institute
Worldwide Locations:
Andersen US
  • Apply Now
  • Alumni
  • Client Login
  • Media Inquiries
  • Featured Insights

      Featured Insights

    • Real Estate
    • QSBS Planning
    • Cryptocurrency
    • Cost Segregation
  • Who We Are
  • Who We Serve
  • Services
  • Our People
  • Resource Center
  • Careers
  • Offices
  • Global Presence
  • Apply Now
  • Alumni
  • Client Login
  • Media Inquiries

Services

  • Tax
  • Tax Compliance
  • Accounting for Income Taxes
  • U.S. International Tax
  • State & Local Tax
  • Tax Controversy
  • Credits & Incentives
  • Compensation and Benefits
  • Global Mobility
  • Transaction Advisory
  • M&A Financial Transactions​
  • Sell-Side Advisory
  • Buy-Side Advisory
  • Financial & Tax Due Diligence
  • Fund Formation & Structuring
  • Valuation
  • Tax Planning & Compliance
  • Wealth Transfer
  • Financial Reporting
  • Asset Valuations & Analysis
  • Litigation & Dispute Support
  • Specialized Analysis
  • Private & Outsourced Accounting
  • Temporary Staffing Assistance
  • Financial Statement Administration
  • Financial Planning & Analysis
  • Cash & Asset Management
  • Controls, Processes, & Procedures Advisory
  • Personal Accounting & Bill Pay
  • Private Wealth
  • Individual Tax Compliance & Planning
  • Investment Consulting
  • Wealth Transfer
  • International & Cross Border
  • Family Office
  • Forensic Accounting
  • Specialized Services
Cost Segregation Continues to Deliver Value

Cost Segregation Continues to Deliver Value

Cost segregation has long benefited taxpayers with increased cash flow.

learn more

Who We Serve

  • Businesses
  • Family Enterprises
  • Pre-IPO Businesses
  • Private Equity Owned Investments
  • Middle-Market Businesses
  • Large Companies
  • Individuals & Families
  • Family Enterprise Owners
  • Entrepreneurs & Founders
  • Corporate Executives
  • Family Offices
  • International & Cross Border Wealth
  • Multigenerational Families
  • Fund Principals
  • Philanthropists
  • Alternative Investment Funds
  • Private Equity
  • Venture Capital
  • Real Estate
  • Hedge Funds
  • Fund of Funds
  • Distressed Assets
As Trade and Tariff Wars Intensify, United States Businesses Must Brace for Heightened Instability

As Trade and Tariff Wars Intensify, United States ...

In a time of heightened trade instability, businesses are facing the challenges.

learn more

  • Apply Now
  • Alumni
  • Client Login
  • Media Inquiries
  • Andersen Global
  • Andersen Consulting
  • Andersen Institute
null
null
stock market ticker on computer screen
Home/ featured insights/ 409A Valuations

409A Valuations

Venture-backed companies likely have valuation concerns regarding equity incentives granted to founders and employees as it relates to Sec. 409A of the Internal Revenue Code. 409A valuations are most commonly performed to assist companies with setting the strike price for their employee stock options, which needs to be at or above fair market value.

How do I know when I need a valuation?

If you answer yes to any of these questions, it’s time for a valuation:

  • Do you plan to issue stock options to employees and/or investors?
  • Has it been 12 months since your last 409A?
  • Have you recently raised a new round of funding?
  • Has your company had any significant events impacting the value of its stock?

But do I really need a valuation?

Unlike for public companies, fair market value of a private company's stock is not readily available by looking through stock tickers. Accordingly, IRS regulations dictate that “fair market value may be determined through the reasonable application of a reasonable valuation method.” They go one to state that if a method is applied reasonably and consistently, such valuations will be presumed to represent fair market value. A reliable independent appraisal is required to determine reasonable fair market value, which can include factors like secondary market transactions, founder stock redemptions, market value of comparable businesses (both public and private), etc. The consequences for failing to comply with section 409A make it critical to properly evaluate your company's fair market value.

Fair market value.
IRC Sec. 409A requires that stock options be issued with a strike price at or above the fair market value of the underlying stock. A 409A valuation is used to determine the fair market value so that the company can determine the exercise price of future options that will be granted.

Potential Penalties.
Options granted with a strike price below fair market value of the underlying stock are considered deferred compensation and, if not previously recognized, are subject to two penalties to be paid by the employee:

  • Interest in the amount of the federal underpayment rate plus 1%.
  • An additional 20% income tax on top of the employee's regular federal tax obligation.

Bottom line: If your company fails to comply with the 409A rules, your employees will be personally liable for immediate taxation – plus a 20% penalty tax, and potential interest payments.

What else do l need to consider?

  • A valuation needs to be performed by someone who is qualified (based on their knowledge, training, experience, etc.). In most cases, companies choose to hire outside appraisal firms to meet this requirement.
  • The valuation needs to be updated at least every 12 months, or more frequently if significant changes occur in the business between grant dates (such as new rounds of financing).

Remember the IRS can look back three years, six years if there is a “substantial under reporting of income." They are also known to use 20/20 hindsight.

Door White
Andersen US
LinkedIn Twitter Facebook
  • Featured Insights
  • Who We Are
  • Who We Serve
  • Services
  • Our People
  • Resource Center
  • Careers
  • Offices
  • Contact Us
  • Client Login
  • Global Presence
  • U.S. Services
  • For Private Clients
  • For Businesses
  • For Alternative Investment Funds
  • Valuation
  • Andersen Global
  • Andersen Consulting
©2025 Andersen Tax LLC. Andersen Tax LLC is the founding member firm of Andersen Global, a Swiss verein comprised of legally separate, independent member firms located throughout the world providing services under their own name or the brand “Andersen Tax” or “Andersen Tax & Legal,” or “Andersen Legal.” Andersen Global does not provide any services and has no responsibility for any actions of the member firms, and the member firms have no responsibility for any actions of Andersen Global. Your use of this website is subject to the terms and conditions governing it. Please read these terms and conditions before using the website.
Sitemap | Terms & Conditions | Privacy Policy | Cookie Notice | Andersen Tax LLC Privacy Notice | Accessibility