WTF Is 409A and Why Should I Care?

If you have ever heard someone at a startup say, “We need a 409A” and everyone nods like it is obvious, you are not alone.

A 409A valuation (named after a section of the U.S. tax code) is an independent estimate of what a private company’s common stock is worth. It is most commonly used to set the strike price for employee stock options. In plain terms, it helps you avoid setting an option price that creates tax problems later.

Even if you are not a U.S. company, 409A concepts often show up in global fundraising. Many investors, legal frameworks and option plan structures borrow from U.S.-style governance and “best practice” equity setup.

What founders need to do

A 409A matters because it can be the difference between “we granted options responsibly” and “we created a surprise tax bill.”

When you issue employee stock options, you need a fair and defensible price for the common shares those options convert into. If the strike price is set too low without a credible valuation behind it, tax authorities can treat the discount as compensation. That can trigger penalties and extra taxes for option holders.

Founders care about 409A because it helps protect:

• Your team by reducing the risk of unexpected tax outcomes

• Your company by improving compliance and lowering legal and accounting risk

• Your financing by reducing cap table issues that surface during diligence

Investor implications

Investors often view a 409A as a signal of operational maturity and cap table hygiene.

A solid 409A process suggests the company:

• Grants equity in a structured way

• Understands the difference between preferred and common value

• Reduces the risk of morale issues caused by mispriced options

• Avoids diligence landmines when a deal is close to signing

A 409A does not replace diligence. It is simply one indicator that the company takes core governance details seriously.

Myth-busting: is a 409A the same as “our valuation”?

Not exactly.

Section 409A of the U.S. Internal Revenue Code governs nonqualified deferred compensation. In startup practice, when people say “a 409A” they usually mean a 409A valuation, an independent appraisal used to support the fair market value (FMV) of common stock for setting an option strike price.

Your headline startup “valuation” from a funding round is typically based on what investors pay for preferred shares, which come with additional rights such as liquidation preferences. Common stock usually values lower than preferred, so a lower 409A-based common price can be normal.

A 409A is not just paperwork. It is a practical way to keep equity compensation fair and defensible for employees and easier to explain during diligence. For founders, it reduces avoidable tax and compliance risk. For investors, it is a small but meaningful signal that the company understands equity mechanics and maintains a cleaner cap table.

Where WOWS Global comes in

A clean 409A story supports credibility with employees and investors. It affects how equity compensation is priced, how the cap table holds up under diligence and how consistent the valuation narrative feels across fundraising conversations.

WOWS Global helps founders connect equity structure, valuation narrative and fundraising readiness so you enter investor discussions with fewer surprises and clearer documentation. If you are preparing for a round, cleaning up your cap table or aligning equity and valuation positioning, we can help you tighten the story and the underlying inputs.

WOWS Take

A 409A valuation is one of the simplest ways to prevent equity compensation problems from becoming tax problems. It also makes diligence smoother because option pricing and common stock FMV are easier to defend. Investors do not treat it as a substitute for diligence, but they do notice when it is missing or sloppy.

If your cap table is growing and you are granting options regularly, treat 409A discipline as part of operational hygiene. WOWS Global can help you align your equity plan, documentation and valuation narrative with what investors expect. Submit a Pitch to share your current setup and what you are preparing for.

FAQ

How often do we need to refresh a 409A valuation?
In general, companies refresh when there is a material change that could affect common stock value. Common triggers include a new financing, a major revenue shift, a meaningful acquisition offer or other events that change risk and prospects. Many startups also refresh on a regular cadence as a governance habit.

What happens if our option strike price is set too low?
If the strike price is not supported by a defensible fair market value, tax authorities may treat part of the option value as discounted compensation. That can create unexpected taxes or penalties for employees and can become a diligence issue in a funding round. The practical risk is less about one document and more about whether pricing decisions are supportable.

Why is 409A common stock value usually lower than our last round valuation?
Your last round valuation is typically tied to preferred shares, which can include rights like liquidation preferences and other protections. Common shares do not have the same rights, so their fair market value can be lower even if the business is doing well. This gap is normal in many startups. What matters is that the method is consistent and defensible.