Updating Your 409A Valuation After a Fundraise

Raising a new round of capital is an exciting milestone—it validates investor confidence, provides fresh momentum, and sets the stage for growth. But with every funding round comes an important compliance step many founders overlook: the need to update your 409A after funding. A fresh 409A valuation ensures compliance with IRS guidelines, determines the updated fair market value (FMV) of your company’s common stock, and keeps you safe from potential tax liabilities for both the team and shareholders.

If you’ve recently raised a seed, Series A, or later round, this guide will walk you through why a post-funding valuation 409A is required, what triggers a 409A refresh, and how to manage the process effectively.

What Is a 409A Valuation, and Why Does It Matter?

A 409A valuation is an independent appraisal of your company’s common stock price. It establishes the FMV at which employees can purchase equity through stock options without facing immediate tax liability.

• Ensures IRS compliance under Section 409A rules

• Protects employees from paying additional tax penalties

• Provides a “safe harbor” valuation, so long as it’s performed by a qualified third party

• Sets the baseline for future grants in your cap table

Without an updated 409A, equity grants issued post-fundraise may be considered undervalued, opening up risks of re-pricing, penalties, and employee dissatisfaction.

Why You Must Update 409A After Funding

When you close a funding round, your company’s valuation has materially changed. The IRS considers this a valuation change trigger. Issuing stock options based on an outdated FMV is non-compliant and could risk IRS penalties for both the company and employees.

Key reasons to update your 409A after funding include:

• Alignment with market value: A funding round sets a new benchmark for your company’s worth.

• Updated FMV for equity grants: Ensures future options reflect the company’s true financial position.

• Safe harbor compliance: Shields your grants from IRS challenges.

• Investor and board confidence: Demonstrates professionalism and financial discipline.

Important Note

Even if your funding round is structured with preferences (preferred stock vs. common stock), the 409A valuation determines the FMV of common stock which is usually discounted compared to preferred shares. Independent assessors use methodologies such as option pricing models (OPM) or hybrid approaches to account for this.

When to Refresh Your 409A Valuation

As per IRS guidelines and industry best practice, you should obtain a 409A refresh:

1. Immediately after funding: A new funding round is the most common trigger.

2. Every 12 months (minimum): Even if no material changes occur, compliance requires an annual refresh.

3. Material events: Examples include:

   • Major revenue growth or contract wins

   • M&A discussions or acquisitions

   • Significant leadership changes

   • New product launches or regulatory approvals (important in biotech/fintech/AI sectors)

The Process of Updating Your Post-Funding Valuation 409A

Here’s a step-by-step guide to managing your 409A refresh efficiently:

1. Engage a reputable valuation firm

   • Specialists like Carta, Eqvista, or independent CPA firms provide defensible reports.

2. Provide updated financials and cap table

   • Include your new share classes from funding (preferred stock issuance).

3. Determine valuation methodology

   • Option Pricing Model (OPM)

   • Probability-Weighted Expected Return Method (PWERM)

   • Hybrid approaches

4. Review draft valuation with your board

   • Board approval ensures compliance and record-keeping.

5. Finalize and issue new FMV

   • Begin granting new options at this updated FMV.

Common Mistakes to Avoid in a 409A Refresh

Startups often trip up by delaying their post-funding valuation 409A or treating it as an afterthought. Here are critical mistakes to avoid:

• Granting stock options using pre-funding valuation – risky and non-compliant.

• Choosing a cheap or inexperienced 409A provider – puts safe harbor at risk.

• Not updating within 12 months – even without funding, you need a fresh valuation.

• Failing to submit updated cap table – incorrect inputs can miscalculate FMV.

Case Study: A Real-World 409A Refresh Scenario

Imagine a Series A-funded SaaS company in Bangalore, India raising $10M at a $50M pre-money valuation. Before the round, its 409A FMV was just ₹50 per share. With the new funding, preferred stock is priced at ₹200 per share.

A valuation expert steps in and, after adjusting for liquidation preferences and discounting back to common stock, determines the new FMV (updated 409A) is ₹80 per share.

• Employees granted stock options after the fundraise receive them at this new FMV.

• This protects both the company and the employees.

• Had the company continued using the ₹50 FMV, it could have triggered IRS penalties and a forced equity re-pricing.

Quick Checklist for Updating Your 409A Valuation After Funding

• Closed a funding round? Schedule a new 409A immediately.

• Share updated financials, forecasts, and cap table with your provider.

• Review valuation methodologies (OPM, PWERM, hybrid).

• Secure board approval before issuing post-funding option grants.

• Refresh again within 12 months or after major business events.

Conclusion

Updating your 409A valuation after a fundraise isn’t just a compliance checkbox it’s a financial safeguard for your company and employees. A post-funding valuation 409A validates your updated FMV, keeps you aligned with IRS regulations, and builds trust with both current and future investors.

If you’ve just closed a round, don’t delay your 409A refresh. Protect your team, maintain safe harbor, and keep your cap table clean by acting quickly.