In the startup world, terms like “valuation” are often misused. A common mistake is confusing “409a valuations” with the investor-facing valuation or valuation cap that is negotiated during a funding round. Here’s the key difference: 409a valuations are only relevant when issuing stock options to your team—and it’s usually best to keep them relatively low.
A 409a valuation is an independent appraisal of your company’s common stock value, conducted by a third party to comply with IRS rules. This appraisal sets the fair market value of your common shares, which determines the strike price for stock options. Aligning the strike price with an independent valuation creates a Safe Harbor against IRS scrutiny under Section 409A of the tax code. Typically valid for a year, you’ll need a new valuation sooner if your company’s financial situation changes—like after a big fundraise.
Why does this matter? The strike price (set by the 409a valuation) determines what your team pays to exercise their options. The larger the gap between this price and the fair market value at sale, the bigger the financial reward to your team. Keeping the 409a valuation lower maximizes this potential benefit, making your equity a more powerful incentive.
Pro tip: If a fundraising event is on the horizon, issue promised options beforehand to avoid a higher strike price.
Need a refresher on stock options? See “Here’s When an Option Plan Can Help”.
Managing an option plan can cost anywhere from $10k to $40k a year. Fortunately, we designed Gust Launch to make it significantly less expensive! Gust Launch’s Raise tier will help you adopt and manage a compliant option plan for $3,500 a year, including a yearly 409A Valuation with audit support. It includes:
Ready to get started? Head to your Gust Launch dashboard to upgrade to Raise at a prorated price.
If you’re still not sure, you can continue to dive into our resources like this blog that explains why the word ‘Valuation’ has confused so many founders. Let me know if you have further questions or would like to join a Q&A session to speak with Gust’s experts to see if adopting an Option Plan makes sense for you.