United States. Treas. Reg. 1.409A-1(b)(5)(iv) and 26 U.S.C. 409A
What is a 409A valuation, and which safe harbour applies to you?
A 409A valuation sets the fair market value of private common stock, so option grants create no taxable deferred compensation. Three methods are presumed reasonable. Outside them, the burden is yours and the employee risks a 20 percent additional tax.
Question 1
What are you granting?
Section 409A bites on stock rights whose exercise price is below the fair market value of the underlying stock on the grant date. Not every equity award raises the question.
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The three 409A safe harbours and their conditions, 2026
Last updated
Section 409A does not require a valuation. It makes a below-market option exercise price expensive, and the regulations then set out three valuation methods that are presumed reasonable. This table sets out all three with every condition attached to each.
| Safe harbour | What it is | Conditions | Who it suits | How it fails in practice |
|---|---|---|---|---|
| Independent appraisal | A valuation of a class of stock determined by an independent appraisal meeting the requirements of section 401(a)(28)(C) and the regulations | Dated no more than 12 months before the relevant transaction to which it is applied, and genuinely independent | Any private company granting options, and the only realistic route once the start-up conditions stop holding | A grant made in the gap after the twelve months expire, or an unrefreshed valuation applied after a priced round or another material event |
| Illiquid start-up presumption | A valuation made reasonably and in good faith and evidenced by a written report, of illiquid stock of a start-up corporation | No material trade or business conducted by the corporation or a predecessor for 10 years or more; no class of equity traded on an established securities market; no put or call rights other than a right of first refusal on an offer; no change in control event reasonably anticipated within 90 days; no public offering reasonably anticipated within 180 days | Early-stage companies before a priced round, where an appraisal fee is genuinely hard to justify | One condition quietly stops holding: the company crosses ten years, or a sale conversation starts, and grants continue on the old basis |
| Illiquid start-up: the valuer | The person performing the valuation must be qualified | Significant knowledge, experience, education or training, where significant experience generally means at least five years of relevant experience in business valuation, appraisal, financial accounting, investment banking, private equity, secured lending or comparable work | Companies with a genuinely qualified person available to them | A founder or an early CFO writes the report. The five year standard is objective and is checked after the fact |
| Formula method | A valuation based on a formula that would be treated as fair market value under the non-lapse restriction rules | Used consistently for that class of stock for all transfers to the issuer or to a more than ten percent owner, compensatory or not, other than an arm's length sale of substantially all the outstanding stock | Structures where one formula genuinely governs every share transaction, such as some professional and employee-owned companies | The formula prices option exercises and something else prices a buyback. Consistency fails, and with it the presumption for both |
| Readily tradable stock | Not a safe harbour but the general rule: the market answers the question | The last sale before or the first sale after the grant, the closing price on the trading day before or of the grant, the mean of the high and low on either day, or any other reasonable method using actual transactions | Public companies | An averaging method chosen after the fact. The program must irrevocably specify the commitment before the beginning of the specified period |
| Rebutting a safe harbour | What the IRS has to show to displace the presumption | That either the valuation method or the application of that method was grossly unreasonable | Everyone: this is what the presumption is worth | Not applicable. Outside a safe harbour there is no presumption to rebut, and the burden runs the other way |
| Failing section 409A | The consequence, and who bears it | All compensation deferred under the plan for the year and all preceding years is includible in gross income to the extent not subject to a substantial risk of forfeiture, plus interest at the underpayment rate plus one percentage point, plus an additional tax equal to 20 percent of the amount included | Nobody. The exposure falls on the option holder, not on the company that failed to get a valuation | Discovered in diligence, during an acquisition, when it is expensive and public |
- A 409A valuation is not required by section 409A: what the regulations provide is three valuation methods that are presumed reasonable, and the presumption is what the exercise buys.
- The independent appraisal safe harbour requires a valuation dated no more than 12 months before the relevant transaction to which it is applied, so a grant made after it expires sits outside the presumption.
- The illiquid start-up presumption requires a written report, no material trade or business for 10 years or more, no traded equity, no change in control anticipated within 90 days and no public offering within 180 days.
- A person performing an illiquid start-up valuation needs significant experience, which generally means at least five years of relevant experience in valuation, appraisal, accounting, investment banking, private equity or secured lending.
- The formula method requires the formula to be used consistently for all transfers of that class of stock to the issuer or a more than ten percent owner, not only for option grants.
- To rebut a safe harbour valuation the Commissioner must show that the method or its application was grossly unreasonable.
- Where a plan fails section 409A the additional tax is 20 percent of the compensation required to be included in gross income, on top of the income tax and interest at the underpayment rate plus one percentage point.
How this was compiled, and how to cite it
Every condition in this table is taken from the text of Treas. Reg. 1.409A-1(b)(5)(iv) as published on Cornell LII, read on 15 August 2026, and is quoted rather than summarised where the wording carries the meaning. The consequence rows are taken from 26 U.S.C. 409A(a)(1), which provides for inclusion in gross income, interest at the underpayment rate plus one percentage point, and an additional tax equal to 20 percent of the compensation required to be included. No fee, price or market rate appears anywhere in this table. That is deliberate: the cost of a 409A valuation is set by providers rather than by any public source, it varies by company stage and complexity, and publishing a range without the quotes behind it would be a guess presented as a benchmark. What the table does instead is state what each safe harbour requires, so that a valuation you commission or an internal report you prepare can be checked against the conditions it has to satisfy.
Cite this page
“The three 409A safe harbours and their conditions, 2026”, Get 409A Valuation, https://get409avaluation.com/ (updated 2026-08-15). Every condition in this table is taken from the text of Treas. Reg. 1.409A-1(b)(5)(iv) as published on Cornell LII, read on 15 August 2026, and is quoted rather than summarised where the wording carries the meaning. The consequence rows are taken from 26 U.S.C. 409A(a)(1), which provides for inclusion in gross income, interest at the underpayment rate plus one percentage point, and an additional tax equal to 20 percent of the compensation required to be included. No fee, price or market rate appears anywhere in this table. That is deliberate: the cost of a 409A valuation is set by providers rather than by any public source, it varies by company stage and complexity, and publishing a range without the quotes behind it would be a guess presented as a benchmark. What the table does instead is state what each safe harbour requires, so that a valuation you commission or an internal report you prepare can be checked against the conditions it has to satisfy.
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Tell us the stage of the company and when you need the report. Valuation providers who work with companies at that stage will contact you directly.
Read next
The longer answers, with sources.
The three 409A safe harbours, and what each one demands
Independent appraisal, the illiquid start-up presumption and the formula method. The conditions on each, and which condition stops holding first.
When a 409A valuation expires, and what a material event does
Twelve months is a ceiling on the age of the valuation at the grant date, not an annual subscription. What ends it early, and what to do about grants in the gap.
What happens if you grant options without a 409A valuation
Section 409A(a)(1) puts the exposure on the option holder: income inclusion, interest at the underpayment rate plus one point, and a 20 percent additional tax.
Why a 409A value is lower than the price investors paid
Investors buy preferred stock with liquidation preferences and control rights. A 409A values the common. The gap is a feature of the instrument, not a discount.
What it does and does not check
The 6 things it checks
- Whether a 409A valuation is needed at all for what you are granting
- The independent appraisal safe harbour and its 12 month limit
- The illiquid start-up presumption and every condition attached to it
- The formula method, and the consistency requirement that catches people out
- What happens where options were already granted without a valuation
- Based on the text of Treas. Reg. 1.409A-1(b)(5)(iv) and 26 U.S.C. 409A, read on 15 August 2026
Get 409A Valuation is an information site. It is not affiliated with, endorsed by or connected to the Internal Revenue Service or any government body, and it is not a valuation firm, a law firm or a tax adviser. Nothing here is tax or legal advice on a particular grant, and no page on this site produces a valuation. Every condition stated is taken from the text of Treas. Reg. 1.409A-1 or 26 U.S.C. 409A as published on Cornell LII and read on the date shown at the top of the page, and is quoted rather than paraphrased where the wording carries the meaning. We publish no price for a 409A valuation anywhere on this site, because no public source sets one. We take no commission from any provider and carry no paid placements.
Straight answers
What is a 409A valuation?
A determination of the fair market value of a private company's common stock, used to set option exercise prices so grants create no deferred compensation under section 409A. Section 409A does not itself require one. Treas. Reg. 1.409A-1(b)(5)(iv) gives three methods presumed reasonable. Inside one, the Commissioner can rebut only by showing the method or its application was grossly unreasonable.
Is there a Form 409A, and is a 409A appraisal the same as a 409A valuation?
There is no IRS form called Form 409A. The name comes from section 409A of the Internal Revenue Code, 26 U.S.C. 409A. A valuation is not filed with the IRS; the company keeps the report as evidence of fair market value at each grant. A 409A appraisal and a 409A valuation are the same report.
How long is a 409A valuation valid?
Under the independent appraisal safe harbour, the valuation must be as of a date no more than 12 months before the grant. It is an age limit at grant, not an annual subscription. A grant after the twelve months is outside the presumption, even with a replacement commissioned. A material event, such as a priced round, can end it early.
Can we do a 409A valuation ourselves?
Only under the illiquid start-up presumption, if all hold: a written report made reasonably and in good faith. No material business for 10 years or more, no traded equity, no put or call rights beyond a right of first refusal. No change in control within 90 days or offering within 180. The valuer generally needs five years' experience.
What happens if you grant options without a 409A valuation?
The exposure falls on the option holder, not the company. Under 26 U.S.C. 409A(a)(1), compensation deferred under a failed plan for the year and all preceding years becomes gross income unless subject to a substantial risk of forfeiture. Add interest at the underpayment rate plus one percentage point and a 20 percent additional tax. Acquisition diligence commonly finds it.
Why is the 409A value lower than what investors just paid?
They price two different securities. Investors buy preferred stock, which typically carries a liquidation preference paid ahead of the common, board representation, protective provisions and anti-dilution protection. A 409A valuation values the common, which has none of those, is illiquid and usually a minority position. The gap is what the preferred holds, not a discount for convenience.
Do RSUs need a 409A valuation?
The 409A analysis differs. It targets stock rights whose exercise price can sit below fair market value, so options and stock appreciation rights raise it. Restricted stock vesting on a service condition is generally outside it. But restricted stock granted below fair market value produces compensation income, and RSUs settling on a date other than vesting can be deferred compensation.
How much does a 409A valuation cost?
No public body sets the price; providers do. 12 of the 50 provider pages we read on 12 October 2026 publish one, from $499 to $2,000, median $899. It varies with stage, capital structure complexity, whether preferred rounds need allocating across share classes, and urgency. Our price index shows every figure beside the provider's own words.(409A Quote Price Index, 12 of 50 providers' pages publishing a price, read 12 October 2026)
Sources
This site's own datasets, every figure quoted from its source and dated:
- The 409A Platform Bundle Coverage carries 2 published figures read from 2 sources' own pages, from 990 to 1,000 USD, read 11 November 2026.
- The median published figure in the 409A Quote Price Index is 899 USD across 13 figures from 11 sources' own pages (range 499 to 2,000 USD; 12 sources publish a figure, some priced per year), read 11 November 2026.
- The 409A Safe Harbor and Refresh Rules carries 3 published figures read from 3 sources' own pages, from 30 to 90 day, read 8 November 2026.
Find out which safe harbour you are in
What you are granting, whether the stock is traded, whether the start-up conditions hold, and who would sign the report.
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