409A Process: Best Practices and What to Expect

February 21, 2017 Jeron Paul

So you are looking to get a 409A valuation and you are wondering about the 409A process?  You’ve come to the right place.

We have been performing 409A valuations for the better part of a decade now.  The process has gotten continually better and lower-cost for companies.  That’s the good news.

The bad news is that you can still make some important mistakes.  We wrote this post to help you avoid those.  If you follow this post, you should end up with a great valuation experience regardless of who you end up choosing.

Of course, the Shareworks Startup Edition valuation process has some significant advantages over other options so we’ll be sure to point areas of differentiation out as well.  

We just released a brand-new web-based, onboarding flow for our valuation clients that dramatically simplifies and standardizes the process.  We’ll highlight elements of that process in this post:


Every company’s process is a bit different but all should have basically the same steps in basically the same order:

  1. Determine the right 409A valuation partner
  2. Set timing expectations
  3. Sign a service agreement
  4. Provide relevant information
  5. Receive initial valuation draft
  6. Review draft internally
  7. Provide any comments or suggestions back to the valuation partner
  8. Receive final draft
  9. Keep records
  10. If necessary, the valuation partner defends its work to your auditors

We’ll show you how we do it and show off some of the our innovations along the way, but this document should be a pretty authoritative guide to the process no matter where you go.

Step 1: Determine the Right 409A Valuation Firm

Few things are more frustrating to early-stage startups than the need to value their stock to comply with some seemingly bizarre regulation.  

There are times when you may not need to pay for a valuation and you can do it yourself.  But the consequences of doing it wrong can be bad.  Because of this risk, most companies choose to outsource the 409A to a qualified third party valuation firm.  

Outsourcing your 409A in this way guarantees safe harbor.  Safe harbor massively decreases your 409A risk.

With our 3rd party partners, our solution offers the lowest-cost, highest quality 409A on the market (yes, we are biased).  But we only provide our services to customers who also use our cap table management software.

We keep the cost of your valuation down in large part because 409A valuations require an intimate knowledge of the equity structure of your company. Our software tracks and manages all of your shareholders and stock grants.  

There are other huge benefits to using a cap table management solution like startup edition.

Learn more about our 409A valuation offering, connect with our team or just get started.

We’ve written a comprehensive guide to 409A valuation here.  So in this article we will assume you have a fair bit of background on the 409A process.

Regardless once you have picked a partner, then information sharing begins.

Step 2: Set Timing Expectations

Many people skip this step at their own peril.  You should agree with your valuation partner in advance about the timing of several important deliverables:

  1. When you will get the valuation firm all of the required information about your company they will need to perform the valuation
  2. When you need the final valuation report
  3. When you expect to receive a draft valuation report

Over the 1,000+ valuations we have worked on, we have noticed a recurring theme.  The biggest problem in meeting client’s timing expectations is knowing when they will provide us with all of the relevant information we need to perform a valuation.   

It takes some work to get us all of the relevant information but usually not much more than a focused hour or so.  

If you get us all of the relevant information, we can give you back a full valuation report within 10 days.  If you need it faster, we offer rush services.  

However, if you only give us your financial projections, information about future rounds, and other financials a couple of days before your deadline, we won’t be able to make it.

Make sure to be clear about your timing needs as well. Our team handles this by adding it to our standard web-based onboarding process.

Some of us offer very fast turnaround times.  While this can be a good idea, we generally recommend that you work through multiple drafts of a valuation report over multiple days.  The opportunity to discuss the valuation with your board, law firm, valuation partner, and to catch and correct errors will be better.

As a side note, one thing to be careful of here is that your valuation is actually being looked at by a professional, and not just generated through an algorithm.

It also gives you more time to work towards the lowest defensible valuation.  As you probably already know, getting the lowest defensible strike price is in the best interest of the company and its employees.

We have written a guide that will help you work with your valuation firm to get the lowest possible strike price.

Step 3: Sign a Service Agreement

The next step is to sign a service agreement with your partner.  The services agreement provides standard legal protections (like a mutual NDA) and helps to make sure expectations and obligations are clear to both parties.

Our agreement includes standard software usage language and a separate engagement letter with a 3rd party valuation firm.  

Since most customers pay for our solution month-to-month, most people just do a quick review of the terms and sign.  Here the complete text of our service agreement.  

Likewise, we have standardized the valuation engagement letter that we send to our clients on behalf of our partner firms.  

We combine both of these agreements into one master agreement that you can review and sign electronically.  


Step 4: Provide Relevant Information

There are several pieces of information you will need to provide to make sure you get a defensible valuation of your company.  You will also need to make a few decisions.

Information you need to provide:

  1. Valuation date
  2. Deadline of the valuation report
  3. General company info (employees, website, basic description)
  4. Information about how the company makes money
  5. Your cap table
  6. Your latest articles of incorporation
  7. Information about any convertible securities you have
  8. Financials and projections
  9. A few other optional items

If you are already a customer, we really only need:

  1. Valuation date (optional)
  2. Deadline of the valuation report
  3. Updated projections
  4. An update on any changes to your business that we wouldn’t be aware of

This can seem like a lot of information.  This is why we created our own onboarding tool where you can answer some survey questions for 5 minutes and just upload any files that we may need.

We also feel that giving you the flexibility to work on getting us the information we need at your leisure is important.  So we added in the ability to save your progress:


If you don’t keep your cap table and equity records on Shareworks Startup Edition, this process will help you understand why you will want to in the future.

To do an accurate valuation, your valuation partner will need to understand everything about your equity structure that could affect the equity waterfall.  If you haven’t been keeping accurate records, this part of the process could take some time and will involve quite a bit of work.

Selecting the Right Valuation Date

Selecting the valuation date is a topic of frequent confusion for 409A clients.

First, the valuation date is different than the delivery date of the valuation report.

The IRS requires that you value your company on a particular day.  Like July 3rd of this year.  That may sound strange but it is common practice for many tax valuations. It is a called a point-in-time valuation estimate.  

To comply with 409A, you will need a point-in-time valuation estimate.

This means that you and your valuation partner will need to agree on a particular date.

Why should you care?

409A valuations are generally good for 12 months after that date.  Some valuation firms try to scare you into believing that you need multiple valuations every year but that just isn’t true (except in rare cases).  

So you generally want to pick a valuation date as late as you can without messing up the employees who are waiting for the 409A-approved stock grants.

Several other factors could affect the date.  If you are raising money, it’s often advantageous to get a 409A valuation before you sign the term sheet.  This can help you get the lowest strike price that is defensible.  

Click here to download our guide to working with your valuation firm to get the lowest possible strike price.

In general though you are fine to pick a date anytime around the time you reach out to the valuation firm.

You may be wondering what to do if you need a valuation report for options granted in the past.  This is definitely possible but you should call us to talk about it.

Step 5: Receive Initial Draft

After you have provided all of the information required, you should get a valuation draft back from your partner at the agreed upon date.  For most firms this takes anywhere from 1-5 business days.

This is a great time to review the draft report for accuracy with the valuation firm.  Accuracy is critical because errors can cost you time and money down the road with your accounting firm.


Some valuation firms have really low prices but also poor enough quality that you may as well have performed the valuation yourself.  

Some of the companies out there use software with very limited capabilities to perform their valuations.  Make sure your partner can perform valuations using all of the AICPA recommended approaches like doing a DCF, using public and private comps, using cost-based approaches

Here are some other quick warning signs:

Step 6:  Review Draft Internally

Once you have reviewed the draft with the valuation partner, you can review it internally.  Generally, you should have the following individuals review it:

  • CFO
  • CEO
  • Board of directors members (especially the compensation committee if you have one)
  • Founders (if they are still running the company)
  • Inside counsel (if you have one)
  • Outside counsel

This can often take several days because of busy schedules so make sure you plan accordingly.


Step 7: Provide Any Comments or Suggestions Back to Valuation Partner

Take any comments you receive from your internal review back to your valuation partner.  Most of the time we see comments focused on getting to a lower strike price.


Getting a lower strike price is tricky.  You shouldn’t do anything that increases your risk with the IRS.  Most reputable valuation partners won’t sign a report unless they believe it is defensible.  But there is still a lot you can do to help them understand why your strike price should maybe be lower.  Download our guide to getting the lowest strike price to learn more.

This stage can often happen quite quickly with a fast phone call.  Sometimes we can provide you with an updated report almost immediately afterward.

Step 8: Receive Final Draft

You can start issuing stock options at the new strike price as soon as you and your valuation partner agree on a final strike price.  So you don’t technically even need a final report at that time.

However, you will want to make sure you get a final PDF version of the final report.  Most firms send this over within 3-5 business days.

Step 9:  Keep Your Records

If you are using a system like ours, your records will always be kept for you.  However, it’s a good idea to file a copy of your final 409A report somewhere else as well.  This could be important if you are ever audited.

Step 10:  Valuation Partner Defends Work with Auditors

This is where your valuation partner will really earn whatever you paid them.  If you aren’t an audited company you don’t need to worry about this now.  But if you become audited in the future, the auditors might also want to review prior valuation work performed for you.

This is why, again, you want to work with a reputable 409A valuation partner.

The best valuation partners stay on top of the many changing aspects of valuation work.  It might seem like the valuation industry is sleepy but actually accepted and favored valuation approaches are constantly changing.

We actually try to influence the valuation standard so that they work in our client’s favor through thought leadership and engagement with auditors.

If you are like most companies, you’ll probably need a new 409A valuation roughly once every 12-18 months.  So work with a valuation partner you like and trust.  
We hope this guide helped you understand the process and make it smoother for all parties.  


Previous Article
Independent 409A Valuations – How to Choose a Firm
Independent 409A Valuations – How to Choose a Firm

Finding a good independent 409A valuation firm can be difficult, especially with all the misinformation out...

Next Article
4 Key Insights from Analyzing 5,000+ Cap Tables
4 Key Insights from Analyzing 5,000+ Cap Tables

Capshare recently published the 2016 Private Company Equity Statistics Report. In it, we analyzed a signifi...