How to Find the Right 409A Provider…and Why It Really Matters

May 28, 2018 Shareworks Marketing

So, you’re a new startup and you want to attract the best talent – the crème de la crème of the industry. How do you convince them to join your company in a competitive hiring market? Why not offer them shares in your company?

Hold on, before you can start divvying up those shares and hiring top talent, you’ll need to get a 409A valuation.

  • What’s a 409A valuation? It’s a report that sets the value of your company’s shares.
  • Why do you need one? Because the IRS says so and not doing what they say usually ends up badly for you and your company.
  • How do you get one? You pick a 409A provider who delivers a written report.

There’s a lot to cover on the subject of 409As, but we’re gonna keep it simple in this post and help you understand the need to knows around 409A compliance and what to look for in a 409A provider.

Here’s what we’re going to cover in this post:

What Is a 409a Valuation?

How Do I Get a 409A Valuation?

What Happens If I Don’t Get a 409A?

How Do I Protect My Company and Employees?

How Do I Find a Provider?

  1. The DIY Method
  2. The Qualified Individual
  3. Third-Party 409A Valuation Providers
  4. Opt for Cap Table Software with a 409A Bundle

How Much Will a 409A Valuation Cost?

What We Recommend

What Is a 409a Valuation?

Stock options give employees the right to buy stock at a predetermined price (the strike price) at some point in the future. But you first need to determine what the strike price should be. The IRS 409A regulation stipulates the strike price must be equal to the Fair Market Value (FMV) of your company’s common stock. If the strike price is set too low, you and your employees may face some fairly unpleasant consequences. But how do you evaluate stock, especially if you’re a very early stage startup? Who could possibly have that knowledge?

409A providers do. Or, at least they have the tools and experience to make the best assessments.

Learn more about how providers value your company in our post, “A Better 409A Valuation Report and Process for Early Stage Companies.”

How Do I Get a 409A Valuation?

In order to get a 409A valuation, you hire a 409A provider and work with them to analyze your company’s mission, data, financials, etc. After their assessment, the 409A provider will deliver a report with your company’s common stock price.

The Difference in a Stock Price and a Strike Price
The common stock price is not the same thing as a strike price, though it can be. According to the law, the strike price may not be lower than the value of the common stock. Typically, companies and employees want the lowest possible strike price, so they’ll go with the common stock price; however, a company that wants to err on the side of caution could choose a slightly higher strike price than the value of the common stock. For the most part, though, the strike price ends up being equal to the common stock price.

The common stock price is not the same thing as a strike price, though it can be. According to the law, the strike price may not be lower than the value of the common stock. Typically, companies and employees want the lowest possible strike price, so they’ll go with the common stock price; however, a company that wants to err on the side of caution could choose a slightly higher strike price than the value of the common stock. For the most part, though, the strike price ends up being equal to the common stock price.

So who are these people who have the sage wisdom to see into the future of your company’s stock value?

First of all, they’re accredited. A valuator should have proper credentials such as a CVA.

Second, they should never have struggled to pass an audit, and they should be vouched for by the Big 4 auditors.

Third, a valuator should have “significant experience,” which section 409A defines as having at least five years of relevant experience in business valuation or appraisal, financial accounting, investment banking, private equity, secured lending or comparable experience in the company’s industry.

And finally, they should be independent.

We’ll talk more about your 409A provider choices a little later in this post.

When Do I Need A 409a?

If you can answer yes to any of these questions, it’s time to get a 409A valuation.

  • You plan to offer stock options to employees or contractors.
  • It has been 12 months or more since your last 409A (if you have received one 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 may be other circumstances where your company needs a 409A valuation. If you think you might fall into this grey area, you can speak to one of our qualified 409A experts for more information and guidance.

What Happens If I Don’t Get a 409A?

Back up! What was that about the unpleasant consequences of 409A non-compliance?

There are numerous consequences to not following the 409A regulation and they affect both your company and your employees.

Basically, if the strike price of your stock is set too low, and the options are purchased at that strike price, the IRS raises a red flag.

The lower the strike price is below the FMV of the stock, the more you owe in taxes, so if the IRS thinks your employees bought their shares at a price lower than the stock’s actual value, they will think your shareholders are not paying enough in taxes. The IRS doesn’t like that very much.

If the IRS determines that your strike price is too low, your employees may face these consequences:

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

To make matters worse, it’s likely that the employee hasn’t exercised their options yet or sold their shares, so not only will they be taxed on money they haven’t actually received, they probably won’t have the cash to pay the tax debt, which could result in even more penalties.

But it’s not just your employees and shareholders you need to worry about. …

The consequences of shoddy 409A work or undervaluing your stock prices extend to your company as well. It could mean a lot of extra work and money.

For example, if your company is audited, and the auditor is not satisfied with your 409A, they could ask you for justification of your valuation. If the auditor decides they need to dig deeper, it’s likely that they will charge you for the extra time.

And, if the auditor decides that your valuation was done incorrectly, they may ask you to redo the valuation which might even mean reissuing stock at the correct strike price and restating past financial statements.

Reissuing stock options is not something you want to do. If you find yourself in this undesirable situation, you could face legal fees, unhappy employees, accounting costs, and a lot of time you could be using to grow your business.

Want to Learn More about 409A Compliance and Consequences of Failing to Comply? Read our blog post: “Just How Bad is 409A Non-Compliance for a Startup, Really?

How Do I Protect My Company and Employees?

The first thing to do – get a 409A valuation from a qualified provider.

So, what makes someone a “qualified provider?” There are a couple characteristics you should look for in a provider before working with them. The most important two are independence and experience.

In a nutshell, independence means there is no conflict of interest.

More specifically, the IRS has defined exactly what it means to be an independent valuator, “Valuators will employ independent and objective judgment in reaching conclusions and will decide all matters on their merits, free from bias, advocacy, and conflicts of interest.”

The IRS requires the valuation firm to attest that it “has no interest in the [company] that is the subject of the report” and that its “compensation is not contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of, [the] report.”

An example would be someone valuing your shares who also owns shares in your company.

When choosing a provider, you also want to make sure they have enough experience to be considered “qualified” by the IRS. A provider will be considered very experienced if they have the following merits:

  • The valuator has proper credentials such as a CVA
  • They offer indefinite audit defense for their valuations
  • A Big 4 auditor can vouch for their defensibility
  • The provider has never struggled to pass an audit
  • They can prove their independence

The second thing to do – keep your 409A up-to-date.

Like we mentioned earlier, you need a 409A valuation every 12 months or any time there is a material change to your company (new round, acquisition, issuing new options since your last 409A, etc.)

You don’t want to follow all the rules and then drop the ball by letting a material change pass without updating your 409A. That’s one reason we recommend a subscription service for 409A valuations, which we will get to in just a minute. Before we dig into that though, we need to talk about safe harbor.

Why You Want Safe Harbor and How to Get It

Safe harbor is the best way to protect your company and employees from the fall out of an IRS audit, but you’ll need to have a 409A in order to get it.

Having safe harbor means two things:

  1. You do not have to prove that your valuation is correct.
  2. If the IRS has an issue with your valuation, the IRS must prove that your valuation was “grossly unreasonable.”

Safe harbor puts the burden of proof on the IRS. Basically, you are innocent until proven guilty.

If you don’t have safe harbor, you lose that protection. You are guilty until you prove yourself innocent.

You must meet one or more of the following conditions to achieve safe harbor:

  • The valuation must be performed by a “qualified individual,” independent appraiser, or third-party valuation firm
  • The valuation must be performed within the last 12 months
  • The valuation must be evidenced with a written report
  • Secure an internal valuation from a qualified individual
    • (only valid in the case of an illiquid startup)

Ok, so what are the takeaways? You can and should protect your company and employees with an annual 409A valuation from a qualified provider. And by doing that, you’ll also achieve safe harbor from the IRS.

How Do I Find a Provider?

You have four options for choosing a 409A provider:

  1. The DIY Method
  2. The Qualified Individual
  3. Third-Party Valuation Firm
  4. Opt for Cap Table Software with a 409A Bundle

Each one of these provider options has its pros and cons, and we’ve broken them down below. The most important thing to keep in mind here is how much risk you can (or want to) tolerate since some of these provider methods are safer than others.

Another thing to keep in mind, some of these methods are fine in the early stages, but as your company grows, you’ll need to opt for one of the more thorough 409A providers.

That said, let’s jump in and break down your choices…

1. The DIY Method


  • This option is cheaper
  • You might have more control over the process


  • You will not have safe harbor, but you may have the potential for “good faith” standing; Shareworks Startup Edition's 409A calculator can help you there
  • You don’t have audit protection
  • You may have to settle for a higher strike price just to be on the safe side and employees may not be very happy about that

Stage: You may use a DIY approach at any stage, but it generally only makes sense for very early stage companies.

Realistically, the only reason you should be considering a DIY approach to 409A is if you’re a very early stage startup and prefer to spend your capital on growing your business rather than filing some seemingly tedious paperwork and paying for a professional valuation firm.

To some extent, we agree. We even wrote an article about it

That being said, there is very little reason that you should go it alone entirely, especially since the potential risk is very high, and the cost of a 409A valuation doesn’t have to be. In fact, it’s gone way down in recent years.

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 25 409A reports from competing 409A firms. 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%. – Data Driven Guide

Perhaps the best tool we can arm you with in your DIY 409A endeavor is our free 409A calculator. You must meet certain criteria to use this method though:

  • No reliable source of revenue or cash flow
  • Raised less than $500K in investment capital
  • Cap table has no preferred stock or convertible debt instruments (KISS, SAFE, etc.)
  • Company does not reasonably anticipate an IPO in the next 180 days or an acquisition in the next 90 days
  • There has been no buying or selling of shares of the company’s stock
  • Company’s assets are worth $100k or less
Although not recommended, you can also attempt to discover the value of your common stock using one of the following methods: a probability weighted backsolve OPM or cost approaches. For a more in-depth discussion of valuation methods, check out our whitepaper on the subject.

2. The Qualified Individual


  • Depending on the individual, the valuation could meet both safe harbor and good faith tests
  • It may be a more affordable option depending on your company’s size


  • The criteria listed by the IRS for what is considered a “qualified” individual are ambiguous, and therefore somewhat risky
  • Safe harbor is not 100% guaranteed
  • It may be more complicated than hiring a professional valuation firm, because there are more rules and more ambiguity

Stage: You could hire a qualified individual for 409A services at any stage; however, this option is similar to the DIY method in the fact that it’s significantly riskier than hiring a valuation firm. Also, the process could take a lot longer if you are a larger company hiring a qualified individual.

Qualified individuals is a tricky term, because the IRS doesn’t provide much of a definition. What they have said is that the qualified individual who performs the valuation should have at least five years experience in relevant areas such as business valuation, financial accounting, investment banking, private equity, secured lending, or other comparable experience.

The following individuals are often seen as “qualified”:

  • Angels, directors, board members or investors with significant valuation and financial expertise.
    • This would typically mean something like 5+ years doing a significant amount of private company valuation work. It isn’t clear that financial skills (like those of a CFO) or investing skills (like those of a VC) would really qualify as compliance-specific valuation skill. So using individuals in this category will be somewhat risky unless they are former compliance valuation professionals.
  • Valuation professionals (with a specific emphasis on compliance-focused valuation work)

If you want to use a qualified individual and you want safe harbor, your company must meet certain criteria:

  • The company is illiquid
  • The company is less than 10 years old
  • The company has no publicly traded securities
  • There is no granted company stock subject to a put, call, or similar derivative
  • There is no reasonable anticipation that the company will be acquired within 90 days or go public within 180 days

If you choose to hire a qualified individual to do your 409A valuation, you must be able to tolerate a certain amount of risk.

Due to the ambiguity of what can truly be considered a qualified individual, the IRS may decide that the individual you hired for your 409A valuation is not actually qualified. If this is the case, you may lose safe harbor protection and be subject to audits and IRS penalties.

3. Third-Party 409A Valuation Providers


  • You have safe harbor protection
  • If you have a good valuation firm, they will defend the valuation for you
  • You may get a lower strike price
  • You can be confident that you will be 409A compliant down the road when you want to expense your company’s stock options


  • You’re paying more but also taking less risk

Stage: You can hire a valuation firm at any stage.

Some would say that you should hire a valuation firm or go with a software service that partners with a valuation firm (c. option 4) if you’re a later stage company. There’s really no excuse not to protect yourself and your employees if you have the ability to do so.

When choosing a valuation firm, the two most important factors are qualifications and independence.

Before hiring a valuation firm, ask them these questions:

  • Will my valuation be performed by a person or persons who have proper credentials?
  • Have you ever had any trouble passing audits with any firm?
  • How much time do you typically take defending your valuations with audit firms?
  • Have you ever been blacklisted by any of the audit firms?
  • Will you support your valuation report indefinitely and answer any audit review questions that might come up from now until we exit?
  • Can you give me the name of a large (big 4 would work) auditor who can vouch for your defensibility?

Here’s a Handy List of Top Quality Valuation Firms:

Valuation Firm Annual Volume of 409A Reports Number of Employees Pricing

Accounting Firms:

500-1,500 1,000+ (each) $8,000-$10,000+
Andersen Tax 500-1,500 1000+ $5,000-$10,000+
Armanino 500-1,500 1000+ $5,000-$10,000+
Duff & Phelps Fewer than 500 1,000+ $10,000+
Econ Partners 1,500+ 30-60 $2,000-$4,000
Meld Valuation 500-1,500 1-20 $1,200-$5,000
Pagemill Partners 500-1,500 20-50 $5,000-$10,000
Quist Valuations 500-1,500 1-20 $5,000-$10,000+
Scalar Analytics 1,500+ 20-50 $2,500-$5,000+
Simple409A 500-1,500 1-10 $1,200-$5,000
Shareworks Valuation Services 1,500+ 1-20 $2,000-$10,000+
Teknos 500-1,500 1-20 $5,000-$10,000+

Sources: number of employees from company website and LinkedIn; pricing and volume of 409A reports is an estimate based on our experience

4. Opt for Cap Table Software with a 409A Bundle

What we’re talking about here is cap table software that partners with independent third-party valuation firms. What that means is that you get the best of both worlds for a fraction of the cost.


  • Affordable and risk free
  • You have safe harbor protection
  • Valuations will have indefinite defensibility
  • You may get a lower strike price
  • Get two services in one (cap table management and 409A valuations)
  • The monthly subscription keeps your 409A up-to-date and spreads out payments
  • Once you are on the software platform, future 409As are extremely simple since your cap table data is already available and up-to-date for the valuation to use.


  • You need to onboard with the software first

Stage: You can use the cap table software and 409A bundle method for any stage. Even very early stage startups will find this useful, as it is very affordable and you get two services in one.

In the past, your best bet would have been a valuation firm, but now, there’s a better solution with 409A + cap table management software subscriptions. According to our data-driven 409A valuation guide, 40% of all newly VC-backed startups are choosing the cap table software and 409A bundle method.

Why would so many companies choose this option?

Using cap table management software partnered with third-party 409A services is less work and less time. Rather than pay lawyers to keep managing your cap table and risk errors, you can use cap table management software to simplify that whole process, while ensuring the strictest compliance standards are met for your 409A valuation.

And time? It only takes about 10 days to get your valuation through Shareworks Startup Edition. Part of that time savings is because your data is available to the valuation firm immediately.

See, when you sign up for cap table management, your documents and cap table are uploaded into the software, so when it’s time for your 409A valuation, all that paperwork is already handled. That saves you a huge headache.

Another benefit is the cost. We’ll touch on this in the Pricing section more, but basically, using cap table software with a 409A subscription saves you thousands of dollars and spreads out the cost over 12 months. 

Lastly, going with this option guarantees a defensible 409A valuation backed by the best independent valuation firms in the world, which means you’ll have safe harbor.

There are also some benefits just for having cap table management…

  • Your cap table is always up-to-date
  • You have one cap table of record in the cloud
  • No wasted time syncing up with other cap table versions the CFO, lawyer or founder has buried in their files
  • Shareholders have access to their holdings, so no more pings and requests for a copy of the cap table
  • You can stop paying expensive lawyers to manage your cap table
There’s a lot more to be said about cap table management! If you’d like to explore cap table management in more depth, you can schedule a call with an expert here.

Here are some things you should ask before going with a cap table software and 409A bundle:

For 409A valuations:

  • Will my valuation be performed by a person or persons who have proper credentials?
  • Have you ever had any trouble passing audits with any firm?
  • How much time do you typically take defending your valuations with audit firms?
  • Have you ever been blacklisted by any of the audit firms?
  • Will you support your valuation report indefinitely and answer any audit review questions that might come up from now until we exit?
  • Can you give me the name of a large (big 4 would work) auditor who can vouch for your defensibility?

For the software:

  • What kind of software did you use in performing the 409A?
  • Is the software SOC-1 Type 1 certified?
  • Will auditors ask us questions about how you arrived at certain calculations? How much time does that typically take?
  • What kind of valuation credentials do your software engineers have?
  • Has the valuation software been tested, used, and supported by one or more valuation services firms? Which ones?

A Word of Warning…

Watch out for cap table companies that own a valuation firm and also facilitate the sale of shares on their platform. It is a major conflict of interest if the same group valuing your shares also sells them. For the record, we do not sell shares or offer any liquidity services for shareholders. However, we will direct you to the right place if you need to sell shares.

How Much Will a 409A Valuation Cost?

409As are relatively new. When they were first introduced in 2005, everyone scrambled to comply. Valuation firms were born into a world where they were desperately needed but without a precedent to set a price for their services. Since then, with more options becoming available, the costs have decreased.

For the purpose of this section, we’re going to focus mostly on the last two 409A provider options: valuation firms and cap table software bundled with a 409A service.

The DIY and qualified individual methods are typically more cost-effective, but significantly riskier, so if you want safety and a good deal, keep reading…

Valuation firms can indeed be costly. It can be difficult to know what a fair price is if you’ve never had experience working with a valuation firm. That’s why we compiled an average pricing chart based on data from 147 companies and 6 different valuation firms based on stage.

You can use this chart to make sure you’re not overpaying.

No matter what, make sure you choose a valuation firm you trust and that you can see yourself having a good relationship with because that relationship may be a long one.

When you opt for cap table software with a 409A bundle, like Shareworks Startup Edition, you will often times get a better price for your 409A valuation because the cap table software keeps your cap table and other documents up to date. This means less work and time spent gathering data or consolidating mismatch data from multiple manual cap tables.

Another benefit to startup edition's 409A pricing is that it’s paid monthly over an annual period so your payments are spread out. 

What We Recommend

Navigating compliance regulations is always tricky, especially in the finance world, but getting a 409A valuation doesn’t have to be that hard. Here’s what we recommend:

  • Get your 409A valuation on time, every time. By choosing a cap table software with a 409A bundle, your 409A valuation will always be up-to-date.
  • Get a new 409A if you have a material change to your company like new rounds or new option grants.
  • Always opt for a 409A provider that can guarantee you safe harbor and defends against audits indefinitely.
  • Don’t overpay for 409A services.

We recommend choosing cap table software with a 409A bundle because you get more for your money, as well as everything on our must have list above. A platform like startup edition offers 409A services that save you time and money, but you also get the added advantage of cloud-based cap table management, which comes with a whole list of perks of its own.

We partner with the leading valuation firms to give our 409A customers independent, timely and affordable 409A valuations that always guarantee safe harbor and indefinite audit defense. Plus, our monthly 409A subscription not only gives you a great deal, it also lets you space out payments over 12 months so even the newest startups can afford to keep their 409A up-to-date.

If you’re ready to get your 409A valuation and start issuing stock options to employees, schedule a call with us today!



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