409A Valuation
What is a 409A Valuation? Why It Matters for Stock Options
A 409A valuation is an independent assessment of a private company's Fair Market Value per share, named after Section 409A of the US Internal Revenue Code. Companies must set stock option exercise prices at or above fair market value.
Companies typically get a 409A valuation annually, after every funding round, or after a significant material event. The valuation is performed by an independent third-party firm.
While 409A is US-specific, the concept of independent FMV valuation is relevant globally. Indian companies value ESOPs under the Companies Act. European companies follow IFRS 2.
As an employee, the 409A determines your exercise price (at grant) and your paper value (current FMV minus exercise price). Lower 409A at grant time means more upside potential.