409A valuation

How it works

Named after section 409A of the US tax code. Required every 12 months, or after any material event (e.g., a new round). Setting option strike prices below the 409A creates massive tax exposure for employees. The 409A is typically much lower than the preferred-stock valuation from the most recent round (often 20–35%), creating built-in option upside for employees.

Related terms

• Option pool (ESOP)
  An option pool is a reserved allocation of equity (typically 10–20% of the company) set aside to grant to current and future employees as stock options.
• Vesting (and the cliff)
  Vesting is the schedule on which an employee earns their granted shares — most commonly 4 years with a 1-year cliff, meaning no shares vest until 12 months in, then monthly thereafter.
• Post-money valuation
  Post-money valuation is what a company is worth after the new investment is added (pre-money + the amount raised).