409A Valuation Calculator for US startups (2026)

A 409A valuation sets the fair market value (FMV) of a private US company's common stock. Stock options must be granted with an exercise price at or above that value. If they are not, Section 409A of the US tax code taxes the employee early and adds an extra 20% federal tax. The calculator above follows the same three steps a valuation firm uses. It values the whole company, splits that value between preferred and common stock, and then discounts the common stock because it cannot be sold freely.

What is a 409A valuation?

Section 409A of the Internal Revenue Code was added by the American Jobs Creation Act of 2004. It sets strict rules for deferred compensation, which is pay that is earned in one year but paid in a later one.

A stock option with an exercise price below the share's fair market value on the grant date counts as deferred compensation. An option priced at or above fair market value generally does not. It must also be over the employer's common stock, with the number of shares fixed at grant and no other deferral feature. So before a company grants options, it needs a fair market value it can defend. That number is what people call "the 409A".

Three points cause most of the confusion:

• It values common stock, not the company. Founders and employees hold common stock. Investors hold preferred stock, which has extra rights. The 409A value is the value of one common share.
• It is not the price investors paid. Investors pay for preferred stock. Common stock is usually worth much less, for the reasons explained below.
• It sets the lowest exercise price allowed. The board can grant options at a higher price, but not at a lower one.

Any US private company that grants stock options or stock appreciation rights to US taxpayers needs a fair market value it can defend. Most get it from an independent 409A valuation. So does a non-US company, including an Indian company, that grants options to people who pay US tax.

How to use this 409A calculator

The calculator works in your browser. Nothing you type is sent or saved anywhere. Work through the five cards from left to right.

1. Cap table. Enter common shares outstanding, the unissued option pool and outstanding options grouped by exercise price. Then enter each preferred series with its shares, issue price, liquidation preference and participation terms.
2. Equity value. Pick the round to backsolve from and enter the price paid per share. You can also add a market approach (revenue and EBITDA multiples) or an income approach (discounted cash flow), give each a weight, or type in a value directly.
3. Allocation. Enter the expected time to a sale or IPO, the volatility, the risk-free rate and any dividend yield. The calculator uses the option pricing method to split the equity value across every class of stock. It shows the breakpoints and how much of each slice goes to common.
4. Marketability. Choose the Finnerty or Chaffe model, or set the discount yourself. A grid shows how the discount changes with time and volatility.
5. Fair market value. See the value per common share, how it compares with the last preferred price, whether a safe harbor applies, when the valuation runs out and what a below-value grant would cost an employee.

You can copy the summary or download it as a CSV file to share with your board or valuation firm.

Worked example

Click "Load an example" in the calculator to see these figures. The company has raised a Seed round, a Series A and a Series B. All three series are non-participating, with a 1× liquidation preference, and they rank equally.

Results from the calculator's example figures.

The Series B investors paid $4.35 a share. Common stock comes out at $2.11 a share. The gap comes from two things: the preferred stock's right to get its money back first, and the fact that common stock cannot be sold freely. The board could grant options at $2.11 or higher. If it granted them at $1.50, the calculator shows the tax cost to the employee.

Key 409A terms explained

Cap table terms

• Common stock: the ordinary shares held by founders and employees. Options are usually options to buy common stock.
• Preferred stock: shares sold to investors, with extra rights such as a liquidation preference.
• Liquidation preference: the amount preferred holders get back before common holders receive anything in a sale. A 1× preference returns the price they paid.
• Non-participating preferred: on a sale, the holder takes either its preference or what it would get by converting to common, whichever is more.
• Participating preferred: the holder takes its preference and then also shares in what is left. A participation cap limits the total it can receive.
• Pari passu: series that rank equally, so they share any shortfall in proportion. The opposite is seniority, where later series are paid first.
• Fully diluted shares: every share that exists or could exist, counting options and preferred stock as if converted.
• Unissued option pool: shares set aside for future grants. The calculator counts them as common stock. Some valuation firms leave them out.

Valuation terms

• Fair market value (FMV): the price at which stock would change hands between a willing buyer and a willing seller, neither forced to deal and both knowing the relevant facts.
• Exercise price or strike price: the price an employee pays to buy each share under an option.
• Total equity value: what all the company's shares are worth together, before it is split between share classes.
• Backsolve: working backwards from the price investors just paid to find the total equity value at which the model gives them exactly that price.
• Market approach: valuing the company using multiples from similar listed companies or from recent deals.
• Income approach: valuing the company from its forecast cash flows, discounted at a rate that reflects the risk.

Allocation terms

• Option pricing method (OPM): treats each class of stock as a call option on the company's total value, and prices each one with Black-Scholes.
• Breakpoint: a company value at which the split between share classes changes, for example when the preferences are paid off or a series converts.
• Volatility: how much the company's value is expected to move. It is usually taken from similar listed companies.
• Risk-free rate: the yield on US Treasury bonds with a term close to the expected time to exit.
• Time to liquidity: the expected number of years until a sale or IPO.
• PWERM: the probability-weighted expected return method. It values the stock under a few exit scenarios, such as an IPO, a sale or a wind-down, and weights them by how likely each is. The AICPA's draft update calls it the scenario-based method.
• Hybrid method: a mix of PWERM and the option pricing method.
• Current value method (CVM): values the stock as if the company were sold today. It suits mainly a company where a sale or wind-down is about to happen. It can also suit a very early company with no basis to value it above the preferred stock's preference.

Discount and compliance terms

• Discount for lack of marketability (DLOM): a reduction in value because private-company common stock cannot be sold freely.
• Put option models: ways of measuring that discount as the cost of an option that protects the holder while they cannot sell. The best known are Chaffe (a protective put), Finnerty (an average-strike put) and Longstaff (a lookback put).
• Common-to-preferred ratio: the 409A value of common stock as a percentage of the latest preferred price.
• Safe harbor: a valuation method that the IRS presumes is reasonable. The IRS can then overturn it only by showing it was grossly unreasonable.
• Material event: a change that makes the current valuation out of date before its 12 months are up.

How is a 409A valuation done?

Valuation firms follow three steps, and the calculator is built the same way.

Step 1: total equity value

The firm first works out what all the company's equity is worth. There are three standard approaches:

• Market approach: multiples of revenue or EBITDA taken from similar listed companies or recent deals.
• Income approach: a discounted cash flow model. Startups are usually discounted at a venture capital rate of return, which is much higher than a listed company's cost of capital.
• Asset approach: the value of the company's net assets. It is mostly used for very early companies or ones winding down.

If the company has raised a priced round recently from outside investors, the backsolve is usually the main method. That price is the best evidence of value the company has. Valuation firms also look at secondary sales of shares, and the AICPA's draft update to its guide gives these more weight than before.

Step 2: allocating value across share classes

Total equity value cannot just be divided by the number of shares, because preferred stock is paid first. The firm uses an allocation method to split the value:

• Option pricing method: the most common method when no exit is in sight. It is the method this calculator uses.
• PWERM: used when the company can see specific exit paths, such as an IPO being prepared.
• Hybrid method: used when one scenario is clear and the rest are uncertain.
• Current value method: used mainly when a sale or wind-down is imminent, or for a very early company.

Step 3: discount for lack of marketability

The common stock value is then reduced because it cannot be sold freely. Valuers use put option models and check them against studies of restricted stock and pre-IPO share sales.

The calculator offers two models. Finnerty was the most used model in a 2024 Business Valuation Resources survey, and its discount never goes much above 32%. Chaffe gives larger discounts, especially at high volatility, and the AICPA's draft update gives it less weight. In the worked example, Finnerty gives 21.33% and Chaffe gives 30.13%. The discount falls as an exit gets closer.

Why common stock is worth less than preferred

Preferred stock is paid back first in a sale, and it can convert to common if that pays more. Common stock gets only what is left. Common is also hard to sell. Together these explain why the 409A value is usually well below the last preferred price.

The ratio moves over time. It tends to rise as an exit approaches, because the preferences matter less when the company is worth far more than they add up to. Close to an IPO, the 409A value moves towards the expected IPO price.

409A safe harbor rules

The rules let a company use any reasonable valuation method. They also give three safe harbors, which make the IRS presume the value is reasonable. With a safe harbor, the IRS has to show the valuation was grossly unreasonable. Without one, the company and the employee have to prove it was reasonable.

The three safe harbors in Treasury Regulation section 1.409A-1(b)(5)(iv)(B)(2).

Even outside a safe harbor, the valuation must take into account all the information available on the valuation date. The rules list the factors to consider, including the value of the company's assets, its expected cash flows, the value of similar companies, recent arm's-length deals and discounts for lack of marketability.

How long is a 409A valuation valid?

A valuation can support grants for up to 12 months. It ends sooner if something material happens. Common examples are:

• a new priced funding round
• a term sheet or an offer to buy the company
• secondary sales of shares at a different price
• a big change in the business, such as losing a major customer or a large jump in revenue
• starting to prepare for an IPO
• settling a major lawsuit or being granted an important patent

Grants made on an out-of-date valuation lose the safe harbor. The calculator shows the date your valuation runs out once you enter the valuation date.

What if options are priced below FMV?

A discounted option fails Section 409A. The employee, not the company, bears the main cost:

• Earlier tax. The spread between fair market value and the exercise price is taxed as the options vest, not when they are exercised. The employee may owe tax before they can sell any shares.
• An extra 20% federal tax on the amount taxed.
• Interest at the IRS underpayment rate plus one percentage point.
• Yearly re-measurement. Under the IRS's proposed rules, the spread is measured again at the end of each year while the options stay unexercised.
• California. California residents pay a further 5% under Revenue and Taxation Code section 17508.2, plus California's own interest charge.

The company must report the amount, in box 12 of the W-2 with code Z for employees, and withhold income tax on it. A company that fails to withhold or report can face penalties of its own.

In the worked example, 50,000 options are granted at $1.50 against the unrounded fair market value of $2.1053. That gives a spread of $30,263, assuming all the options vest in one year and the value does not change. The extra 20% tax alone is $6,053, plus $1,513 more for a California resident. That is on top of $11,197 of federal income tax at the top 37% rate, which falls due at vesting instead of at exercise.

Can a discounted option be fixed?

Sometimes, if the low price was a genuine mistake and you act quickly. IRS Notice 2008-113 lets a company correct an inadvertent error by raising the exercise price to the grant-date fair market value before the option is exercised. The company must also take steps to stop the mistake happening again.

• For anyone, the fix must be made by the end of the year of grant.
• For people who are not insiders, meaning directors, officers and owners of more than 10%, it can be made by the end of the following year.

A board that knowingly grants below fair market value cannot rely on the notice. Outside the notice, an IRS Chief Counsel memo on a bonus plan found that a fix made in the same year an amount vested was too late. So other fixes should be made before the year in which a tranche vests. Take advice from a US tax lawyer before relying on any correction.

409A rules for each type of equity award

Section 409A does not treat every award the same way. The table shows where the 409A value matters.

How Section 409A treats common US equity awards.

Incentive stock options (ISOs)

ISOs get better tax treatment than other options, but they come with strict rules under Section 422:

• They can be granted only to employees, under a plan approved by shareholders.
• The exercise price must be at least fair market value on the grant date. For anyone owning more than 10% of the voting power, it must be at least 110%, and the option can last at most five years.
• For everyone else, an ISO can last at most 10 years.
• Only $100,000 of stock, valued at the grant date, can first become exercisable in any one year. Anything above that is treated as an NSO.
• To get the full benefit, the employee must hold the shares for two years from grant and one year from exercise.

ISOs are not taxed as regular income at exercise, but the spread counts for the alternative minimum tax (AMT). The AMT rules changed for 2026, with the exemption phasing out from $500,000 of income for single filers and $1 million for joint filers. So more ISO holders may owe AMT when they exercise.

Non-qualified stock options (NSOs)

NSOs are taxed when exercised. The spread between fair market value and the exercise price is ordinary income and wages, subject to withholding and payroll taxes. NSOs can be granted to employees, directors, advisers and contractors.

Restricted stock and the 83(b) election

Restricted stock is not deferred compensation, so Section 409A does not apply. But fair market value still matters. An employee who receives restricted stock, or who exercises options early, can file an 83(b) election within 30 days. They are then taxed on the value at that point rather than as the shares vest. The IRS introduced an optional Form 15620 for this election in late 2024.

RSUs and phantom stock

RSUs and phantom stock are promises to pay later, so they are deferred compensation unless paid out quickly. To stay outside 409A, payment must be made by the 15th day of the third month after the end of the year in which the award vests. Otherwise, the payment must be tied to an event the rules allow, such as leaving the company, a change in control or a fixed date. Private companies often use double-trigger RSUs, which settle only after vesting and a sale or IPO.

Stock appreciation rights

A SAR pays the rise in share value above a base price. It is exempt from 409A if the base price is at least fair market value on the grant date, and it can be paid in stock or cash.

Profits interests

LLCs and partnerships grant profits interests instead of options. These give a share of future growth only. The hurdle is usually set at the company's value on the grant date, so the interest has no value if the company were sold that day.

Does 409A apply to Indian companies?

Yes. Section 409A follows the person who pays US tax, not the country of the company. Say an Indian company grants options to an employee in the US, or to anyone who pays US tax. Those options need an exercise price at or above a fair market value worked out to the US standard.

An Indian valuation report does not automatically meet that standard. Indian rules ask a different question, signed by a different professional. A US-style 409A report should be obtained for US grants.

Some other points apply to cross-border groups:

• The stock must be "service recipient stock". That means common stock of the employer or a parent company that controls it. Control usually means at least 50%, or 20% where there is a genuine business reason.
• A foreign parent can grant ISOs to employees of its US subsidiary, if all the Section 422 rules are met, including shareholder approval of the plan.
• Indian employees of a US parent are generally outside 409A, unless they are or become US taxpayers.
• US citizens and green card holders working abroad are still covered.

Companies that have moved their holding company to the US, with an Indian subsidiary, usually need both. They need a 409A for US grants and an Indian valuation under Indian rules for the Indian employees' tax at exercise.

409A, ASC 718 and going public

The 409A value is used beyond setting exercise prices:

• Accounting. Under ASC 718, options are expensed over the vesting period, based on their fair value on the grant date. Since ASU 2021-07 (October 2021), private companies can use a 409A-style valuation as the share price for equity-classified awards.
• Before an IPO. The US Securities and Exchange Commission (SEC) reviews grants made in the 12 to 18 months before an IPO. It looks for "cheap stock", meaning options priced well below the eventual IPO price. If it finds them, the company may have to record more compensation expense, and the IPO can be delayed.
• Rule 701. A private company that sells more than $10 million of stock to employees under Rule 701 in a 12-month period must give them more information, including risk factors and financial statements no more than 180 days old.

What to give your 409A provider

A valuation firm will usually ask for:

1. Your cap table and charter, with every share class, its preference, participation and conversion terms, and all outstanding options and warrants.
2. Financial statements, for the last year and the year to date.
3. Projections for the next few years, with the assumptions behind them.
4. Fundraising documents, including the latest stock purchase agreement and any term sheets.
5. Details of secondary sales, SAFEs, convertible notes and debt.
6. Board consents and anything expected soon, such as a funding round, an acquisition offer or IPO plans.

What this calculator does not do

The calculator shows how the option pricing method works on your own cap table. It is not a 409A valuation, and its result does not qualify for any safe harbor. Some things a real valuation may need are not included:

• Preferred series are treated as ranking equally, not in seniority order. The AICPA's draft update no longer recommends this simplified backsolve.
• Cumulative dividends, anti-dilution adjustments, SAFEs and convertible notes are not modelled.
• PWERM and hybrid scenarios are not included.
• Secondary sales are not weighted.
• Volatility, time to exit and the discount are your own inputs. A valuation firm has to support each one with evidence.

This page is general information, not legal, tax, accounting or valuation advice. Confirm your position with a US tax adviser and a qualified independent appraiser before granting equity.