409A Valuation Vs. Fair Market Value (FMV): What's The Difference?

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When issuing stock options or structuring compensation strategies, numerous founders experience two important-yet often misunderstood-terms: 409A Valuation and Fair Market Price (FMV). At a glance, they may appear interchangeable. In practice, they serve various legal, tax, and operational functions. Understanding the difference between 409A vs FMV is necessary for personal companies, especially startups, that wish to remain certified and competitive.
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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 compensation - Common misconceptions and errors - Best practices for startups

Let's dive in.

What Is a 409A Valuation?

A 409A assessment is an official, independent appraisal used to identify the reasonable market price of a private company's common stock. It gets its name from Section 409A of the Internal Revenue Code, which governs non-qualified delayed compensation.

Startups normally use a 409A assessment to set the strike price of stock alternatives released to workers. Legally, the strike cost need to not be lower than the FMV of the underlying typical stock on the grant date. A 409A evaluation assists make sure compliance with this rule.

For business utilizing Mantle's cap table management platform, the 409A valuation can be streamlined for easy tracking and compliance.

Key Features of a 409A Valuation:

- Conducted by a third-party appraisal company - Required for independently held business providing stock alternatives - Must be upgraded every 12 months or after a product event (e.g., fundraising, acquisition deal). - Provides a "safe harbor" to secure business and workers from IRS charges

For more details on 409A valuations, take a look at our guide.

What Is Fair Market Value (FMV)?

Fair Market Price (FMV) is a wider financial idea specified by the IRS as:

" The rate at which the residential or commercial property would alter hands in between a willing purchaser and a ready seller, neither being under any obsession to purchase or to sell and both having reasonable knowledge of pertinent realities."

FMV can be used in several contexts:

- Sale of company shares or possessions. - Gifting of equity for estate or tax planning. - Purchase of stock options. - Mergers and acquisitions

While a 409A appraisal intends to develop FMV for compliance, not all FMV evaluations fulfill the standards needed under 409A.

409A Valuations vs. Fair Market Price: Key Differences

Here's how 409A appraisals vs. fair market price compare throughout crucial areas:

For a more detailed take a look at compliance and appraisal dangers, have a look at our post on 409A assessment guide.

How the IRS Views 409A Valuations vs. FMV

The IRS uses 409A valuations particularly to regulate deferred payment, such as stock alternatives. If a business issues choices with a strike cost below FMV without a vlid 409A assessment, the comployee could face:

- Immediate income tax on the deferred settlement. - An extra 20% charge tax. - Interest charges on unpaid taxes

Safe Harbor Protection

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

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

FMV, on the other hand, is a general principle utilized by the IRS in numerous tax-related scenarios-not just equity compensation. which transfers of residential or commercial property are judged for tax functions.

Why the Distinction Between 409A and FMV Matters

Understanding 409A appraisals vs. fair market price is vital for:

- Issuing equity grants correctly. - Avoiding pricey IRS charges. - Getting ready for audits, due diligence, and acquisitions. - Planning tax techniques for executives and workers

A typical mistake is assuming the FMV equates to the most recent favored stock price. However, preferred shares often bring liquidation preferences and financier securities, suggesting they deserve more than typical stock.

A 409A Valuation accounts for:

- Capital structure (common vs. favored shares). - Discount for absence of marketability (DLOM). - Financial performance and market comparables. - Risk profile and company phase

Practical Example: VC Round vs. 409A Valuation

Let's say your start-up raises a Series A round at $10/share for preferred stock. That assessment consists of financier rights that typical shares do not have.

A correct 409A evaluation may 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 alternatives at $10/share rather of $2.50/ share could:

- Trigger IRS scrutiny. - Deter staff members from working out alternatives. - Overstate compensation expense on your books

When to Update Your 409A Valuation

To maintain compliance, upgrade your 409A evaluation:

A minimum of every 12 months. After any product event, such as: - New funding round. - Acquisition deal. - Major organization pivot. - Large income change

Failing to update your appraisal can revoke your safe harbor status and expose the business to tax and legal danger.

You can find more information on when to upgrade your 409A evaluation here.

Common Mistakes Companies Make

Depending On Internal FMV Estimates: These usually do not fulfill safe harbor standards and frequently lack paperwork. Confusing Preferred and Common Stock Valuation: Valuing typical stock at the very same rate as chosen can cause overvaluation and compliance issues. Skipping Updates After Major Events: Material modifications like fundraising rounds need to activate an assessment update. Granting Options Without a Valid 409A: Retroactive rates can result in and gross income for workers. Best Practices for Managing 409A Valuations and FMV

- Deal with a credible third-party appraisal company. - Schedule evaluation updates each year. - Update after material events. - Keep in-depth records of all grants and appraisals. - Educate employees on how stock alternatives and FMV work

Final Thoughts: 409A Valuations vs. Fair Market Price

While they're carefully associated, 409A valuations and reasonable market price are not interchangeable. FMV is the broader monetary principle, while a 409A valuation is a specific, defensible technique to identify FMV for providing stock choices in personal business.

For start-ups, the most safe route is to deal with 409A valuations as a legal and compliance requirement, and FMV as the structure of sound equity planning. Understanding and handling both ensures you stay IRS-compliant, draw in leading talent, and maintain transparency with financiers and staff members.

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

More on 409A valuations

409A Valuations for Startups (2025 Guide): What Founders Need to Know.
409A Valuation Cost Breakdown: What to Expect.
How to Get ready for a 409A Valuation: A Step-by-Step Checklist.
Disclaimer: This blog post is supplied as basic information to clients and buddies of Mantle. It must not be interpreted as, and does not make up, monetary, legal or tax guidance on any particular matter, and employers and staff members should always consult their professional advisors, accounting professionals or lawyers as required when thinking about decisions or actions that might affect your company or personal interests. Mantle does not assume any liability for dependence on the information in this blog site post.