409A Valuation Reports: The Data Driven Guide

February 17, 2016 Shareworks Marketing


We recently analyzed 409A valuation data for 147 companies to answer the question:

How do you check the 409A compliance box, get your strike price as low as possible, and spend as little time, money and hassle in the process?

We looked at how the valuation process differs according to your unique funding stage. We looked at how prices have changed across the last 5 years.

We even looked at turnaround time and the factors that are most important across every funding stage.

Buried in that data, we came across some interesting findings.

And today we're going to share what we found with you.

Key Findings

You’ll discover, based on data, the max price you should ever pay for a 409A valuation based on your funding stage. Trends have changed a lot in the past couple years.

Discover how to get your strike price as low as possible (and how low is too low).

You’ll learn the right questions to ask to weed out risky firms and pick the right firm quickly.

You’ll see how the process changes as your company grows from seed stage to Series C+.

We’ll also show you the most common mistakes companies make with 409A valuations and your own risks.

Most importantly this guide will help get you past the weeds to getting a good 409A valuation quickly…

…Get the lowest strike price…

…With the least amount of hassle and without overpaying.

Bonus Checklist: Quickly get your strike price down as low as possible. As the founders of a successful valuation firm, we spill the beans on exactly what to say and do to get the lowest strike price. Grab the checklist here.

409A Valuation Report Infographic: How 409A valuations work and the process for getting them.

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Table of Contents:

Where 409A Comes From

We keep this part brief, but feel free to skip the next section or two if you want to get to the more actionable stuff.

A 409A valuation is just a valuation of your company’s common stock.

When you offer your employees stock options, you are offering them the option to purchase common stock at a specific value, called the strike price.

The government introduced 409A regulations to keep you from offering common stock at a strike price that is less than its actual value.

Why does the government care so much?

Well if you give your employees a strike price of $1 when the actual value of your common stock is $2, then Uncle Sam is only collecting taxes on half the value that’s going to your employees.

That makes Uncle Sam angry and your employees could be saddled with severe tax penalties.

The strike price must never be below the current value of your common stock.

But there are still ways to legally lower your strike price by getting the valuation of your common stock down

As the original founders of one of the most successful valuation firms, we put together a checklist where we reveal all our inside secrets to safely getting the lowest strike price possible.

You can click here to get the checklist and lower your strike price.

When Do I Need a 409A Valuation Report?

There are a few triggers that will require you to get a 409A valuation.

  • You plan to offer stock options to employees or contractors.
  • It has been 12 months since your last 409A (you have received on in the past)
  • Your company raises new funding
  • People start buying and selling the company’s shares (not including the shares you originally issue from your company)

There are two common options for getting a 409A valuation done.

  1. Do the valuation yourself
  2. Have a firm perform the valuation

Option 1: Do the valuation yourself

What if you want to perform the valuation yourself?

We'll assume you are not a professional appraiser or you probably wouldn’t be reading this.

But to answer your question, there are no certifications required to issue a 409A valuation. However, according to the IRS you do need to have “significant knowledge, experience, education and training.”

Now if you are a super early stage company and find yourself needing to issue options there is a DIY 409A calculator that we built that is free. We’ll get to that in option 2 below.


  • If you have the skills and experience to perform complex calculations, then you can save a good bit of money doing it yourself.
  • You may have greater control over the valuation of your common stock. But there is a big tradeoff in risk if you make mistakes.


  • No safe harbor protection. If you are audited, the burden of proof is all on you. While the burden of proof if going through a firm would be on the IRS.
  • Easier to make mistakes.

Option 2: Use the DIY 409A calculator (free software tool)

Have you ever asked yourself this question:

“Do I really need to pay a thousand dollars for a 409A to tell me my early stage startup is basically worth nothing?”

We thought answering “yes” was bullcrap so we built a free DIY tool that is open to the public to use.

It takes the answers you give and creates the valuation and report for you.


  • It doesn’t take much work
  • The report is created for you
  • At an early stage, saving a thousand or 2 can make a big difference.


  • No safe harbor protection. If you are audited the burden of proof is all on you. While the burden of proof if going through a firm would be on the IRS.
  • Not everyone can use it. You have to fit specific criteria. For example you must have no source of reliable revenue, less than 100k in assets, raised less than 500k with no convertible debt, etc to use it

Option 3: Pay a firm to perform the 409A valuation

And the last and most common option is to have a qualified firm do the valuation for you at a fee.

If you aren’t early stage enough to use the diy calculator, or if you aren’t an experienced appraiser, then this is probably going to be where you’re going to land.

Fortunately you found this guide 🙂

For the rest of this guide, we’re going to make sure you:

  • Don’t pay more than you need to
  • Understand the process
  • Evaluate the best option for you, according to your current growth stage
  • Intelligently manage acceptable risk
  • Optimize your strike price

The Process and Time Frames (When Using a Firm)

Knowing what the process looks like will help you avoid rush fees or holding up new hires.

The process and time frame with a typical valuation firm looks something like this:

  • Handing over your data 1-3 days
  • Running the report 10-20 days
  • Review first draft 15 min-1 hour
  • Revisions 1-2 days
  • Final report is delivered 1-10 days

Handing over your data: 1 – 3 days (depends on you)

This is totally up to you. You can get this done in 1 day or 1 year.

Gathering and handing your data over is the most common reason for delays in getting your 409A report.

If you have all the data yourself, that’s great but…

It’s really common for your lawyer or accountant to have some of these files. It’s also common for their versions of your cap table to be out of sync.

So make sure you give them a heads up to have everything ready.

If you’re in a rush, remember that delays normally come from the valuation firm waiting on data.

Documents and data most 409A valuation firms require:

  • Cap table (100% up-to-date)
  • Articles of incorporation
  • Full set of financial statements
  • Financial projections (at least 1 year, but 5 year is better)
  • Any history of secondary transactionsA primary issuance is just 'stock that's being born' or being issued for the first time. Secondary transactions include any changes that take place to existing stock (like being sold, bought back, etc
  • Preferred stock purchase agreements
  • Convertible note or term debt agreements
  • Term sheets
  • Copies of agreements or documents dealing with shareholder rights
  • Copies of partnering agreements, rev share agreements, joint ventures, etc.
  • Any assets or liabilities not on your balance sheet (pending lawsuits, compliance requirements, product warranties, etc)
  • Past 409A reports

Running the Report: 10-20 days

This varies a lot by firm.

Depending on the firm you can normally expect this phase to take less than 3 weeks.

A growing trend today is the 409A as a service that combines cap table management software with 409A’s and other compliance reports.

Because these combined Equity Software + 409A services deliver standardized cap table data to the valuation firms, 409A valuation reports normally cost a good bit less because they take much less time to create.

You can expect a 409A valuation that is coupled with a cap table management subscription to take no more than 10 days to produce.

Review first draft: 15 min to 1 hour


Revisions: 1 to 2 days

A revision or 2 is common if you want to work with the firm to get a lower strike price.

Final Report is Delivered: 1-10 days

How the Process is Changing: The Rise of 409A Subscriptions Coupled with Equity Software

A growing trend is for companies to get their 409A’s through their cap table management software like Shareworks Startup Edition.

In speaking with 500 startups, Y Combinator, Angellist and several other early stage VC funds, they estimated that between 30-50% of all newly VC backed startups are choosing subscription 409A’s coupled with equity management software.

Full disclosure: 500 Startups, Y Combinator, Angellist, and the other VC funds polled for this question are either current clients or have worked with our company in the past.

Subscription 409A's coupled with cap table management software chosen by 30-50% of all newly vc backed startups.

Cap table management software changes the process for getting a 409A quite a bit.

This is because our software already has detailed and up-to-date information about your cap table.

Combining cap table management software and 409A can significantly reduce both the cost and time it takes to run your report. This is exactly what we offer at Shareworks Startup Edition.

Benefits of 409A’s Combined with Cap Table Software:

  • It eliminates the step and time required to gather and hand over your data (it’s already up-to-date and in the system.)
  • It shortens the time it takes to produce the report (10 days).
  • It costs a lot less ($99/mo)

There are a few inefficiencies in the typical process of going with a standalone firm. This leads to a higher cost and longer waiting period.

Inefficiencies of a Typical 409A Valuation:

  1. You or your lawyers need to update the cap table you hand over every single year.
  2. When the CFO, lawyer, and accountant all have their own unique versions of your cap table and documents, it can take time to resolve pieces that get out of sync.
  3. Every cap table spreadsheet is unique and the valuation firm needs to convert all your data into the the format they use.
  4. Valuations are then calculated using a combination of custom excel formulas and manual processes.

With solutions like startup edition that combine cap table management with 409A, cost and waiting periods are greatly reduced.

How Combining Your 409A with Cap Table Software Benefits You:

  1. Your cap table is always up-to-date so there’s no scramble to update things every year.
  2. There is one cap table of record in the cloud, so no time is required to sync up what the CFO, lawyer, or account has.
  3. Every client’s cap table data is in a standard format so the 3rd party valuation firms we partner with can start creating your report immediately.
  4. We developed software to aid our partner valuation firms that is much more specific to 409A valuations than excel formulas and word macros.

There are plenty of fantastic standalone 409A valuation firms out there, but as the market moves towards greater efficiency, the combined “cap table management software” + “409A as a service” will become more standard.

How Much 409A Valuations Cost Today

When the government first started requiring 409A valuations, every company offering stock options in the United States suddenly needed one.

409A valuations started out extremely expensive but as the market has evened out, costs have stabilized at a much lower price point.

But because the 409A valuation market is still so new, there are a lot of firms that maintain an inflated price.

That is why we compiled an average pricing chart based on data from 147 companies and 6 different valuation firms.

The range of pricing for 409A valuation reports from various firms between no investment, seed, series a, series b, and series c+ companies

Last year, we experimented with a service where we helped pair companies looking for a 409A with a firm that best met their needs.

It was a fun experiment and a useful service but we ultimately shut it down once we decided to begin offering 409A’s through startup edition.

But as a result of working with 147 companies and 6 different valuation firms, we learned a lot about pricing across the industry.

So when you are shopping around for a valuation firm, you can use the above graph to evaluate whether the price you are quoted is too high.

How Much Should You Care About Price vs Defensibility

In addition to collecting 409A pricing information, we also collected survey data on priorities from the 147 companies.

These companies ranged in stage from no investment to series D.

This graph shows priorities / preferences for companies when it comes to choosing a 409A. Priorities include price, turnaround time, and defensibility and are separated by funding stage.

We asked them how much they prioritized:

  • Price
  • Turnaround time
  • and Defensibility

The results are pretty fascinating. On average, price trumps every other concern across the board. Even at series D, price was the dominant priority.

Defensibility really doesn’t begin to rise in priority until series B and even then it’s only a little bit. Defensibility only becomes a major concern at series C+.

This graph shows how companies at different funding stages value defensibility on a scale of 1-10. (Funding stages include no investors, seed, series a, series b, and series c+)

Also interesting is turnaround time. It remains a pretty low priority at every stage with the exception of series B.

So if you’re getting a 409A after your series B, it might be good to plan a little ahead so you don’t get slapped with rush fees.

This graph shows how companies at different funding stages value defensibility on a scale of 1-10. (Funding stages include no investors, seed, series a, series b, and series c+)

What Does This Data Mean for You?

While every company is going to have their own unique set of circumstances, there’s a lot you can still apply.

Price is #1.

Obviously you’ll still want your 409A valuation signed by a competent appraiser but at the end of the day the report itself is a commodity.

So once you know you’re getting a reputable firm signing your report, choose the solution that will cost the least and take the least amount of time.

The hidden cost of time

One more factor that you might want to consider is your time.

409A valuations never end. In the best case scenario, you have to do them every single year.

One of the reasons we started our company was to eliminate the hassle of compliance.

We coupled cap table management software with the 409A valuation service to streamline the process:

When you use Shareworks Startup Edition, we always have an up-to-date cap table and the valuation firms we’ve partnered with always get their data in a consistent and accurate format.

As a result the 409A valuation costs less but it also becomes automatic.


No need to do the annual ritual of updating documents and passing updates back and forth between your lawyer and your valuation firm.

409A Penalties/h2>

There are some major penalties if you underestimate the fair market value of your company and get your strike price too low

Some of the penalties that can be incurred include:

  • Your employees (and anyone else with options) will immediately be taxed regular income tax as soon as their options vest.
  • If your employees are unable to pay the increased income taxes above, the IRS may lay severe penalties on top of those taxes.
  • 20% federal penalty
  • The IRS tax underpayment penalty plus an additional 1% penalty
  • State penalties and taxes, depending on the state (for example, California also has a 20% state tax, interest, and penalties)

In other words it’s pretty steep.

On the other hand, if you overestimate the fair market value of your company by getting your strike price too high, your employees will get less income than they could otherwise have.

Of course undercompensating your employees with a strike price that is too high isn’t going to thrill them either.

Risks Factors

So you’ve heard the doom and gloom about being audited and penalized but what is the actual risk?

Here are the major factors that increase or decrease your risk profile:

This chart shows the biggest factors that increase or decrease risk when getting a 409A valuation report.

Strike Price

Your overall risk profile all revolves around your strike price.

A low strike price is awesome, because it means you can offer your employees better stock options that won’t cost them an arm and a leg to exercise.

But at the end of the day, the only way you’ll run into trouble is if the IRS thinks your strike price is too low.

So if you’re really in doubt, or really want to error on the side of caution, you can always settle for a higher strike price.

This is particularly true if you are doing the 409A valuation report yourself.

But it’s a lot safer to gun for a lower strike price if a solid valuation firm has your back.

Safe Harbor Protection

If you are doing the valuation yourself, you do not get safe harbor protection. This means that if the IRS ever challenged your valuation, the burden of proof would fall on you.

The benefit of having a firm perform your valuation is that you can qualify for safe harbor protection and the burden of proof then falls on the IRS should they ever challenge your valuation.

What this means is that you can more safely pursue an aggressive strike price through a firm than yourself.

Read our guide on getting safe harbor protection here.

The Firm You Choose

The firm you choose and especially the actual person within the firm doing the valuation has the biggest impact on your risk profile.

Regardless of the firm, it is essential that the actual person(s) doing the valuation have proper credentials. This is generally an AVA or CVA.

The second issue is the dependability of the firm.

Your risk increases significantly if the firm you choose is unwilling to defend their valuation in the event of an audit.

Below we’ve put together a checklist of key questions to ask any valuation firm to make sure they meet the bare minimum standards…

You don’t need to choose the most expensive firm to get a great, defensible valuation but you do need to make sure they pass this checklist of questions:

If a low-cost valuation firm can pass these tests, then the defensibility of their valuation report is probably a great option for you.

Optimizing Your Strike Price

After a week or two of waiting, you finally get an email from your valuation firm with your first draft.
insider s
You open the report, your eyes skim the contents until you finally reach the strike price…

… And the strike price seems too high.

What do you do?

Obviously you want your strike price to be as low as possible.

A low strike price means it costs new hires less to exercise their shares as well as lower taxes.

And that means you can hire and retain better talent.

But how do you know when you can argue for a lower strike price?

The Data Behind Lowering Your Strike Price

Well as it turns out, we’ve done valuation analysis on over 400 companies.

We found that the value of common stock (which is also the strike price) is typically about 20-40% of preferred.

So that means that if preferred shares are worth $1, you can normally expect your strike price to come in at about 20 to 40 cents.

We also did an analysis on the reports of competing 409A firms with a sample size of 25.

Here we found a mean of 41% and a median of 39%.

These figures ranged more broadly though, with a low of 17% and a high of 89%.

On average, common stock was valued at 41% of preferred, with a median of 39%. The figures ranged from a low of 17% to a high of 89%.

When to Push for a Lower Strike Price

While every company is going to have their own unique circumstances you can use these ranges to give you a good feeling for whether your strike price is low or high.

For example if your common ends up being valued at 20% of preferred, you probably came out on top.

On the other hand, if your common gets valued at 70%, you can go to your valuation firm and tell them that ratio sounds a little high.

Insider Strategies: How to Lower Your Strike Price

As the original founders of one of the nation’s most successful valuation firms, we reveal all our secrets on getting the lowest strike price possible.

It’s not enough to just ask or “negotiate” for a lower strike price.

You need to know the right questions to ask and have the right evidence to back it up with.

So we’ve put together a free actionable checklist of our best insider strategies for safely getting your strike price as low as it can possibly go.

Just click on the download image below to get your free checklist and safely get the lowest strike price possible.

6 Sure-Fire Negotiating Strategies to Getting the Lowest Defensible 409A Strike Price


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