409A Valuation
An independent fair-market-value appraisal of common stock used to set tax-compliant strike prices for employee stock options.
Definition
A 409A valuation is an independent appraisal of a private company's common stock fair market value, performed under the safe harbor of IRC Section 409A (added by the American Jobs Creation Act of 2004). The valuation determines the strike price at which employee stock options can be granted without triggering punitive 409A tax penalties on the employee. 409A valuations are typically refreshed annually, after each priced financing round, or following any material corporate event.What this means in practice
MedTech 409A valuations typically reflect a material discount to preferred stock price because of the preferred's liquidation preference and protective provisions; this discount narrows as the company approaches an IPO.Examples
- A startup MedTech company secured its initial 409A valuation to establish a compliant strike price for stock options offered to its founding engineering team.
- Following a successful Series B funding round, a growing MedTech firm commissioned a new 409A valuation to reflect its increased enterprise value and set updated option strike prices.
- An established MedTech company nearing a potential acquisition obtained an updated 409A valuation, which showed a narrowing discount between common and preferred stock due to its advanced stage.
- •Letting a 409A valuation lapse and granting options at a stale price, exposes employees to personal tax penalties.
- •Granting options between a financing close and the refreshed 409A.
Frequently asked questions
Related terms
Grouped by themeEditor's picks
· Hand-selected related conceptsMore in Investment & Finance
· Same categoryAdjustment that protects investors if the company raises a future round at a lower price.
The governing body elected by stockholders that oversees management, approves major corporate actions, and typically includes investor-designated seats after venture financing.
Interim financing between priced rounds, usually convertible.
Rate at which a company spends cash, typically expressed monthly.
Where this term appears across MedTech Terms.
Latest in MedTech
Sources
3 sourcesSources support the definition or relevant regulatory context, not necessarily every claim on this page. Each is graded against our source-tier hierarchy so you can see what rests on binding law versus commentary.
- 1IRC § 409A, Inclusion in Gross Income of Deferred CompensationTier 1 VerifiedCornell LIIlaw.cornell.edu
- 2Treas. Reg. 1.409A-1, Definitions and CoverageTier 1 VerifiedCornell LIIlaw.cornell.edu
- 3PitchBook - MedTech CoverageTier 4 VerifiedPitchBookpitchbook.com
Inline markers like [1] jump to the matching reference above.