When issuing stock alternatives or structuring compensation strategies, numerous founders experience two important-yet often misunderstood-terms: 409A Valuation and Fair Market Price (FMV). At a glimpse, they may appear interchangeable. In practice, they serve different legal, tax, and operational functions. Understanding the distinction between 409A vs FMV is vital for personal companies, particularly startups, that wish to remain certified and competitive.

In this guide, we'll break down:

- What is a 409A evaluation?
- What is Fair Market Price (FMV)?
- How the IRS views each
- The relationship between 409A and FMV
- Why the distinction matters for equity settlement
- Common mistaken beliefs and errors
- Best practices for start-ups

Let's dive in.

What Is a 409A Valuation?

A 409A appraisal is a formal, independent appraisal used to identify the fair 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 payment.

Startups normally use a 409A appraisal to set the strike price of stock alternatives issued to employees. Legally, the strike rate need to not be lower than the FMV of the underlying common stock on the grant date. A 409A appraisal helps ensure compliance with this guideline.

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 firm
- Required for independently held business issuing stock choices
- Must be updated every 12 months or after a product occasion (e.g., fundraising, acquisition offer).
- Provides a "safe harbor" to secure business and staff members from IRS penalties

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

What Is Fair Market Value (FMV)?

Fair Market Price (FMV) is a more comprehensive monetary principle specified by the IRS as:

" The cost at which the residential or commercial property would alter hands between a prepared purchaser and a willing seller, neither being under any compulsion to buy or to offer and both having affordable knowledge of pertinent truths."

FMV can be used in multiple contexts:

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

While a 409A valuation aims to establish FMV for compliance, not all FMV assessments satisfy the requirements needed under 409A.

409A Valuations vs. Fair Market Price: Key Differences

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

For a more detailed appearance at compliance and assessment threats, have a look at our post on 409A evaluation guide.

How the IRS Views 409A Valuations vs. FMV

The IRS uses 409A evaluations specifically to manage deferred compensation, such as stock choices. If a business problems options with a strike cost below FMV without a vlid 409A appraisal, the comployee could deal with:

- Immediate income tax on the postponed payment.
- An additional 20% charge tax.
- Interest charges on unsettled taxes

Safe Harbor Protection

A compliant 409A assessment offers a safe harbor, moving the concern of proof to the IRS. To quality:

- The appraisal must be performed by a certified independent appraiser.
- It needs to be less than 12 months old.
- There should have been no material changes impacting the valuation.

FMV, on the other hand, is a general concept used 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 evaluations vs. fair market worth is important for:

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

A typical error is presuming the FMV equates to the most recent favored stock price. However, preferred shares often bring liquidation preferences and investor defenses, meaning they deserve more than common stock.

A 409A Valuation accounts for:

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

Practical Example: VC Round vs. 409A Valuation

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

A correct 409A evaluation might examine the FMV of typical stock at $2.50/ share, reflecting:

- Illiquidity of personal shares.
- Subordination to favored stock.
- Risk profile for early-stage companies

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

- Trigger IRS analysis.
- Deter staff members from working out alternatives.
- Overstate payment expenditure on your books

When to Update Your 409A Valuation

To keep compliance, upgrade your 409A appraisal:

A minimum of every 12 months.
After any material event, such as: - New funding round.
- Acquisition offer.
- Major service pivot.
- Large profits modification

Failing to upgrade your appraisal can invalidate your safe harbor status and expose the company to tax and legal threat.

You can discover more information on when to upgrade your 409A appraisal here.

Common Mistakes Companies Make

Relying on Internal FMV Estimates: These normally don't satisfy safe harbor standards and typically lack documentation.
Confusing Preferred and Common Stock Valuation: Valuing typical stock at the same rate as preferred can result in overvaluation and compliance issues.
Skipping Updates After Major Events: Material changes like fundraising rounds must trigger a valuation update.
Granting Options Without a Valid 409A: Retroactive rates can lead to penalties and gross income for workers.
Best Practices for Managing 409A Valuations and FMV

- Work with a respectable third-party valuation company.
- Schedule assessment updates yearly.
- Update after product events.
- Keep detailed records of all grants and evaluations.
- Educate staff members on how stock options and FMV work

Final Thoughts: 409A Valuations vs. Fair Market Value

While they're carefully related, 409A assessments and reasonable market worth are not interchangeable. FMV is the wider financial principle, while a 409A assessment is a particular, defensible approach to determine FMV for issuing stock choices in personal companies.

For start-ups, the most safe path is to treat 409A valuations as a legal and compliance requirement, and FMV as the structure of sound equity planning. Understanding and handling both guarantees you remain IRS-compliant, attract top skill, and keep transparency with financiers and .

Need aid with your next 409A evaluation or cap table management? See how Mantle can assist streamline 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 Prepare for a 409A Valuation: A Detailed Checklist.


Disclaimer: This blog post is provided as basic details to clients and pals of Mantle. It should not be interpreted as, and does not make up, financial, legal or tax recommendations on any particular matter, and companies and staff members must always consult their expert consultants, accountants or attorneys as required when considering choices or actions that may affect your company or individual interests. Mantle does not presume any liability for reliance on the details in this article.