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When issuing stock options or structuring payment plans, many creators experience two important-yet often misunderstood-terms: 409A Valuation and Fair Market Value (FMV). At a glimpse, they might seem interchangeable. In practice, they serve various legal, tax, and operational functions. Understanding the difference in between 409A vs FMV is important for personal business, particularly start-ups, that want to remain certified and competitive.

In this guide, we'll break down:

- What is a 409A evaluation?

What is Fair Market Value (FMV)?
How the IRS views each
The relationship between 409A and FMV
Why the difference matters for equity payment
Common misunderstandings and mistakes
Best practices for start-ups

Let's dive in.

What Is a 409A Valuation?

A 409A valuation is an official, independent appraisal used to identify the reasonable market price of a personal business's common stock. It gets its name from Section 409A of the Internal Revenue Code, which governs non-qualified deferred settlement.

Startups generally utilize a 409A appraisal to set the strike cost of stock alternatives provided to workers. Legally, the strike price must not be lower than the FMV of the underlying common stock on the grant date. A 409A evaluation helps ensure compliance with this rule.

For business utilizing Mantle's cap table management platform, the 409A assessment can be structured for simple tracking and compliance.

Key Features of a 409A Valuation:

- Conducted by a third-party evaluation company
Required for privately held business releasing stock alternatives
Must be upgraded every 12 months or after a product occasion (e.g., fundraising, acquisition deal).
Provides a "safe harbor" to safeguard companies and employees from IRS charges

For more details on 409A evaluations, inspect out our guide.

What Is Fair Market Price (FMV)?

Fair Market Value (FMV) is a wider financial principle specified by the IRS as:

" The price at which the residential or commercial property would change hands in between a willing purchaser and a prepared seller, neither being under any obsession to purchase or to offer and both having affordable understanding of pertinent facts."

FMV can be used in several contexts:

- Sale of company shares or properties.
Gifting of equity for estate or tax preparation.
Purchase of stock choices.
Mergers and acquisitions

While a 409A evaluation intends to establish FMV for compliance, not all FMV evaluations satisfy the requirements required under 409A.

409A Valuations vs. Fair Market Value: Key Differences

Here's how 409A valuations vs. reasonable market price compare across crucial locations:

For a more comprehensive appearance at compliance and appraisal risks, examine out our post on 409A assessment guide.

How the IRS Views 409A Valuations vs. FMV

The IRS utilizes 409A appraisals particularly to regulate deferred compensation, such as stock alternatives. If a business issues options with a strike rate listed below FMV without a vlid 409A appraisal, the comployee might deal with:

- Immediate income tax on the delayed compensation.
An extra 20% charge tax.
Interest charges on overdue taxes

Safe Harbor Protection

A compliant 409A appraisal provides a safe harbor, shifting the concern of proof to the IRS. To quality:

- The assessment should be performed by a qualified independent appraiser.
It must be less than 12 months old.
There should have been no material changes affecting the assessment.

FMV, on the other hand, is a general principle used by the IRS in numerous tax-related scenarios-not just equity settlement. which transfers of residential or commercial property are evaluated for tax purposes.

Why the Distinction Between 409A and FMV Matters

Understanding 409A assessments vs. fair market worth is crucial for:

- Issuing equity grants properly.
Avoiding pricey IRS penalties.
Getting ready for audits, due diligence, and acquisitions.
Planning tax strategies for executives and workers

A common error is assuming the FMV equates to the most recent favored stock cost. However, preferred shares often bring liquidation choices and financier defenses, suggesting they are worth more than common stock.

A 409A Valuation accounts for:

- Capital structure (typical vs. preferred shares).
Discount for absence of marketability (DLOM).
Financial efficiency and market comparables.
Risk profile and organization phase

Practical Example: VC Round vs. 409A Valuation

Let's say your startup raises a Series A round at $10/share for preferred stock. That assessment consists of financier rights that typical shares don't have.

A proper 409A valuation might evaluate the FMV of typical stock at $2.50/ share, reflecting:

- Illiquidity of personal shares.
Subordination to preferred stock.
Risk profile for early-stage business

Issuing options at $10/share instead of $2.50/ share could:

- Trigger IRS analysis.
Deter employees from working out options.
Overstate settlement cost on your books

When to Update Your 409A Valuation

To preserve compliance, upgrade your 409A valuation:

A minimum of every 12 months. After any material occasion, such as: - New financing round.
Acquisition offer.
Major business pivot.
Large revenue change

Failing to update your evaluation can revoke your safe harbor status and expose the company to tax and legal risk.

You can discover more details on when to upgrade your 409A valuation here.

Common Mistakes Companies Make

Relying on Internal FMV Estimates: These usually don't satisfy safe harbor requirements and typically do not have paperwork. Confusing Preferred and Common Stock Valuation: Valuing common stock at the exact same rate as chosen can lead to overvaluation and compliance concerns. Skipping Updates After Major Events: like fundraising rounds should activate a valuation upgrade. Granting Options Without a Valid 409A: Retroactive rates can result in charges and taxable income for workers. Best Practices for Managing 409A Valuations and FMV

- Work with a reputable third-party appraisal firm.
Schedule appraisal updates each year.
Update after material occasions.
Keep in-depth records of all grants and assessments.
Educate staff members on how stock alternatives and FMV work

Final Thoughts: 409A Valuations vs. Fair Market Price

While they're closely related, 409A assessments and reasonable market price are not interchangeable. FMV is the wider monetary principle, while a 409A valuation is a particular, defensible technique to determine FMV for providing stock alternatives in private business.

For start-ups, the safest path is to deal with 409A evaluations as a legal and compliance requirement, and FMV as the foundation of sound equity preparation. Understanding and managing both ensures you remain IRS-compliant, attract top talent, and preserve transparency with investors and workers.

Need assist with your next 409A assessment or cap table management? See how Mantle can help enhance compliance and equity management for you and your legal group.

More on 409A evaluations

409A Valuations for Startups (2025 Guide): What Founders Need to Know.
409A Valuation Cost Breakdown: What to Expect.
How to Prepare for a 409A Valuation: A Step-by-Step Checklist.
Disclaimer: This blog site post is provided as general information to clients and friends of Mantle. It ought to not be construed as, and does not constitute, monetary, legal or tax suggestions on any specific matter, and employers and staff members should always consult their professional advisors, accounting professionals or lawyers as required when considering decisions or actions that might affect your company or individual interests. Mantle does not assume any liability for dependence on the information in this article.