409A valuation

Definition

An IRS-mandated appraisal of your company's common stock price, required so employees don't accidentally commit tax fraud when exercising options. It's always mysteriously lower than what you tell investors your company is worth.

Example Usage

Our 409A came back at $2 per share while we're raising at a $50M valuation, which means the preferred shares trade at a 400% premium—totally normal, nothing to see here.

Origin

Named after Section 409A of the Internal Revenue Code, enacted in 2004

Fun Fact

The 409A valuation industry exists solely because of one tax code section, generating hundreds of millions in fees annually for specialized appraisal firms.

Source: IRS tax code Section 409A and startup equity compensation practices

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