How long are 409A valuations good for?
Takeaway: 409A valuations are good for one year from the date of the valuation. They can, however, be invalidated sooner if something happens that impacts the company’s valuation (e.g., a preferred stock financing).
A 409A valuation is used by startups to determine the fair market value of their stock options for tax purposes. The accuracy of the valuation is critical, as it can impact the exercise price of stock options and trigger negative tax consequences if not done correctly. Here's what startups need to know about how long 409A valuations are good for and what events may invalidate them.
How long are 409A valuations good for?
A 409A valuation is typically valid for 12 months, although it may need to be updated more frequently if there are significant changes to the company's financial position or capital structure. It's important for startups to obtain regular 409A valuations to ensure that the exercise price of their stock options remains in compliance with tax regulations.
What events may invalidate a 409A valuation?
There are several events that may invalidate a 409A valuation, including:
Significant changes in the company's financial position or capital structure, such as a new round of financing or a major acquisition. Receiving a signed term sheet for a financing generally invalidates a 409A valuation.
Receiving a signed term sheet for an acquisition whether this was solicited by the company or not.
Changes to the company's business model, market conditions, or competitive landscape that impact the fair market value of the company's stock options. This can include launching a new product, executing a material contract, significant changes to revenue forecasts or operational metrics, or obtaining a major customer.
Changes to tax regulations or accounting standards that impact the valuation of the company's stock options.
Errors or omissions in the information provided to the 409A provider that impact the accuracy of the valuation.
It's important for startups to work closely with a qualified 409A provider and to keep their valuation up to date to ensure that the exercise price of their stock options remains in compliance with tax regulations. If a startup becomes aware of any events that may impact the accuracy of their 409A valuation, they should work with their 409A provider to update the valuation as soon as possible.
Conclusion
409A valuations are critical for startups to determine the fair market value of their stock options for tax purposes. These valuations are typically valid for 12 months, although they may need to be updated more frequently if there are significant changes to the company's financial position or capital structure.