Before option grants
Establish a supportable common-stock value before approving employee or advisor option grants.
Direct answer
What a 409A valuation is designed to do
A 409A valuation estimates the fair market value of a private company?s common stock. Companies commonly use that analysis when setting option strike prices and documenting the basis for equity-compensation decisions.
Important: a valuation is one part of a compliant equity process. Company counsel, tax advisers, and the board should confirm grant timing, approvals, plan documents, and the appropriate standard for the company?s facts.
Common triggers
When companies request an updated analysis
After a financing
Revisit value after preferred-stock financing, recapitalization, or another capital-structure change.
After a material event
Update assumptions after major revenue changes, a significant contract, acquisition activity, product milestones, or changed market conditions.
During annual governance
Refresh an older analysis when the company continues issuing equity and needs current documentation.
Before an M&A process
Coordinate equity-value analysis with transaction planning and the expected buyer or investor perspective.
For review-ready records
Maintain organized source data, assumptions, methods, and approvals for legal, tax, and financial review.
Engagement process
A straightforward four-step workflow
Scope
Confirm the decision, valuation date, company stage, capital structure, and intended users.
Collect
Gather financial history, forecasts, cap-table information, transaction history, and operating context.
Analyze
Apply appropriate income, market, and asset methods, then reconcile the indications of value.
Review
Walk through assumptions, sensitivities, questions, and final documentation with the company team.
Prepare before the call
Documents commonly requested
- Historical financial statements
- Current results and management forecast
- Capitalization table and security classes
- Recent financing and transaction documents
- Debt, warrants, options, and convertibles
- Customer concentration and recurring revenue
- Product, market, and milestone narrative
- Prior valuation reports and board materials
Valuation methods
How private-company value is analyzed
Income approach
Forecast cash flows are evaluated against company-specific risk, growth expectations, and the time value of money.
Market approach
Relevant companies and transactions provide context, adjusted for differences in size, growth, margins, and risk.
Asset approach
For asset-intensive or early-stage companies, underlying assets and liabilities may provide another indication of value.
The analysis should explain which methods fit the company, how preferred and common equity differ, and which assumptions most affect the conclusion.
409A FAQ
Questions private-company leaders ask
What is a 409A valuation?
It estimates the fair market value of private-company common stock so the company can support the strike price used for employee stock options and related equity decisions.
When does a private company need one?
Companies generally seek an analysis before option grants and revisit it after material events or when the prior analysis is no longer current. Counsel and tax advisers should confirm timing.
What information is needed?
Typical inputs include financial statements, forecasts, capitalization details, financings, debt, options, warrants, company milestones, and relevant comparable data.
How long does it take?
Timing depends on complexity and document readiness. Scope, deliverables, and expected turnaround are confirmed after the initial call.
Can the process be completed remotely?
Yes. Michelet Financial works with private companies nationwide through a remote document, analysis, and review process.
Reviewed information
Primary references and professional review
Reviewed August 2, 2026 by Brandt Michelet for business-valuation and transaction context. His professional background includes corporate financial strategy and M&A experience. This statement does not imply endorsement by a former employer or client.
- IRS Internal Revenue Bulletin 2005-43 ? stock options and fair market value under Section 409A
- IRS Corporate Executive Compliance ? executive compensation and stock-option guidance
- IRS Topic 427 ? stock options
Educational information only; not legal, tax, audit, or investment advice. Final equity grants and Section 409A conclusions should be reviewed with qualified legal and tax advisers familiar with the company?s facts.