Guide
When a 409A valuation expires, and what a material event does
Updated
The most common 409A failure is not a bad valuation. It is a good valuation applied to a grant it does not cover, and the two ways that happens are both entirely avoidable once you see them written down.
The twelve months runs to the grant
The condition is that the appraisal be as of a date no more than 12 months before the relevant transaction to which the valuation is applied. The relevant transaction is the grant.
So a valuation dated 1 March supports grants up to the following 1 March, and not one made on 15 March while the replacement is in progress. Grants in that gap are outside the presumption, and they are usually made by a company that believes it is fully compliant because it buys a valuation every year.
The fix is a calendar, not a policy
Commission the refresh with enough lead time to be delivered before the current one expires, and put a hard stop on grants between expiry and delivery.
Board consents are where this leaks. An option approved by written consent circulated over several days has a grant date that depends on when the last signature arrives, and that date is what the twelve months is measured to.
Material events end it early
A priced funding round is the clearest case. It is new evidence about the value of the company's equity, produced by an arm's length transaction, and applying a pre-round valuation to a post-round grant is applying a method to facts it did not consider.
Others: a signed term sheet or acquisition offer, the loss or gain of a customer that materially changes the outlook, a significant revision to projections, and a secondary sale of common stock at a price the company knows about. None of these is a bright-line rule in the regulation, and all of them are things a later reader will know about.
What to do about grants already made in a gap
Establish the facts before deciding anything: the grant dates, the board approvals, the exercise prices, and the valuation in force on each date. Almost every route to fixing this starts by proving exactly what was granted and when, and companies routinely find the record is less clear than they assumed.
Then take tax advice on the specific grants. The available options depend on timing, on whether the grants are outstanding, and on whether the exercise price actually was below fair market value at the grant date, which is a question a fresh valuation cannot answer retrospectively on its own.