Glossary

409A Valuation

Section 409A of the Internal Revenue Code sets forth the rules regarding taxation on deferred compensation (compensation which is earned now and paid later). Standard employee equity grants, such as options and restricted stock, can be considered deferred compensation. A 409A Valuation determines the fair market value of a company's securities by a qualified valuation firm, and can be used for purposes of determining the exercise price of stock options so that tax isn't immediately due upon the grant of such options. 409A valuations are only valid for at most twelve months from the valuation date, or earlier if a company's board of directors has reason to believe that the 409A valuation is no longer valid (e.g. if they receive a term sheet at a materially different valuation).

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