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When issuing stock alternatives or structuring payment strategies, numerous founders experience 2 important-yet frequently misunderstood-terms: 409A Valuation and Fair Market Value (FMV). At a glimpse, they may seem interchangeable. In practice, they serve various legal, tax, and operational purposes. Understanding the distinction between 409A vs FMV is essential for private companies, especially start-ups, that wish to remain compliant and competitive.

In this guide, we'll break down:

- What is a 409A valuation?

What is Fair Market Value (FMV)?
How the IRS views each
The relationship between 409A and FMV
Why the distinction matters for equity compensation
Common mistaken beliefs and mistakes
Best practices for start-ups

Let's dive in.

What Is a 409A Valuation?

A 409A valuation is a formal, independent appraisal utilized to figure out the fair market value of a personal business's typical stock. It gets its name from Section 409A of the Internal Revenue Code, which governs non-qualified postponed payment.

Startups typically use a 409A assessment to set the strike cost of stock options issued to staff members. Legally, the strike cost should not be lower than the FMV of the underlying common stock on the grant date. A 409A appraisal helps guarantee compliance with this guideline.

For companies using Mantle's cap table management platform, the 409A valuation can be streamlined for easy tracking and compliance.

Key Features of a 409A Valuation:

- Conducted by a third-party valuation company
Required for independently held companies providing stock alternatives
Must be upgraded every 12 months or after a product event (e.g., fundraising, acquisition offer).
Provides a "safe harbor" to protect business and employees from IRS penalties

For additional information on 409A evaluations, check out our guide.

What Is Fair Market Value (FMV)?

Fair Market Price (FMV) is a broader monetary concept specified by the IRS as:

" The price at which the residential or commercial property would alter hands between a ready purchaser and a willing seller, neither being under any compulsion to purchase or to offer and both having sensible knowledge of pertinent truths."

FMV can be used in numerous contexts:

- Sale of business shares or properties.
Gifting of equity for estate or tax preparation.
Purchase of stock choices.
Mergers and acquisitions

While a 409A assessment aims to establish FMV for compliance, not all FMV assessments meet the standards required under 409A.

409A Valuations vs. Fair Market Price: Key Differences

Here's how 409A valuations vs. fair market price compare across key locations:

For a more comprehensive take a look at compliance and assessment dangers, check out our post on 409A assessment guide.

How the IRS Views 409A Valuations vs. FMV

The IRS utilizes 409A valuations particularly to manage deferred settlement, such as stock options. If a business issues choices with a strike cost listed below FMV without a vlid 409A evaluation, the comployee might face:

- Immediate income tax on the postponed settlement.
An additional 20% penalty tax.
Interest charges on overdue taxes

Safe Harbor Protection

A certified 409A appraisal offers a safe harbor, moving the concern of proof to the IRS. To quality:

- The assessment should be performed by a qualified independent appraiser.
It needs to be less than 12 months old.
There need to have been no product modifications impacting the assessment.

FMV, on the other hand, is a basic concept used by the IRS in many tax-related scenarios-not just equity compensation. which transfers of residential or commercial property are judged for tax functions.

Why the Distinction Between 409A and FMV Matters

Understanding 409A valuations vs. reasonable market price is important for:

- Issuing equity grants correctly.
Avoiding expensive IRS charges.
Getting ready for audits, due diligence, and acquisitions. - Planning tax strategies for executives and staff members

A common error is assuming the FMV equates to the most recent preferred stock rate. However, favored shares typically carry liquidation preferences and financier defenses, implying they deserve more than common stock.

A 409A Valuation represent:

- Capital structure (typical vs. favored shares).
Discount for absence of marketability (DLOM).
Financial performance and market comparables.
Risk profile and service stage

Practical Example: VC Round vs. 409A Valuation

Let's say your start-up raises a Series A round at $10/share for favored stock. That valuation includes investor rights that typical shares do not have.

An appropriate 409A valuation may assess the FMV of typical stock at $2.50/ share, showing:

- Illiquidity of private shares.
Subordination to preferred stock.
Risk profile for early-stage business

Issuing choices at $10/share instead of $2.50/ share might:

- Trigger IRS analysis. - Deter employees from working out options.
Overstate payment cost on your books

When to Update Your 409A Valuation

To preserve compliance, upgrade your 409A evaluation:

At least every 12 months. After any product event, such as: - New round.
Acquisition deal.
Major service pivot.
Large earnings modification

Failing to update your assessment can invalidate your safe harbor status and expose the business to tax and legal threat.

You can discover more details on when to update your 409A valuation here.

Common Mistakes Companies Make

Relying on Internal FMV Estimates: These typically do not fulfill safe harbor standards and frequently do not have documentation. Confusing Preferred and Common Stock Valuation: Valuing typical stock at the exact same cost as preferred can cause overvaluation and compliance problems. Skipping Updates After Major Events: Material modifications like fundraising rounds need to trigger a valuation upgrade. Granting Options Without a Valid 409A: Retroactive prices can lead to charges and taxable income for employees. Best Practices for Managing 409A Valuations and FMV

- Work with a trusted third-party appraisal company.
Schedule assessment updates yearly.
Update after product occasions.
Keep comprehensive records of all grants and assessments.
Educate staff members on how stock options and FMV work

Final Thoughts: 409A Valuations vs. Fair Market Price

While they're closely related, 409A valuations and reasonable market value are not interchangeable. FMV is the wider financial idea, while a 409A appraisal is a particular, defensible approach to identify FMV for providing stock options in personal business.

For startups, the best route is to treat 409A appraisals as a legal and compliance requirement, and FMV as the foundation of sound equity planning. Understanding and managing both ensures you stay IRS-compliant, draw in leading talent, and preserve openness with financiers and employees.

Need assist with your next 409A assessment or cap table management? See how Mantle can assist streamline compliance and equity management for you and your legal team.
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More on 409A evaluations

409A Valuations for Startups (2025 Guide): What Founders Need to Know.
409A Valuation Cost Breakdown: What to Expect.
How to Prepare for a 409A Valuation: A Step-by-Step Checklist.
Disclaimer: This blog site post is provided as general info to customers and pals of Mantle. It should not be interpreted as, and does not make up, financial, legal or tax guidance on any specific matter, and employers and staff members need to always consult their professional consultants, accountants or lawyers as needed when thinking about choices or actions that may affect your business or personal interests. Mantle does not presume any liability for reliance on the details in this blog site post.