I'm in a difficult situation and trying to figure out my next steps.
409A valuation for option grants. I've been dealing with this for about 4 weeks now and the situation isn't improving.
I have already consulted briefly with a lawyer but did not get a clear answer.
What are the risks if I pursue this? What's the likely timeline?
We're a pre-revenue startup about to issue stock options to our first 10 employees. Do we need a 409A valuation? They cost $5-15K and we have almost no revenue to value. Can we just set the strike price at the price our seed investors paid?
Yes, you need a 409A valuation if you want your option grants to comply with IRC § 409A. Issuing options below fair market value (FMV) creates a 20% penalty tax plus interest for the option holders — which is a terrible outcome for the employees you're trying to attract. Using the seed investor price is not a safe harbor — the FMV of common stock is almost always lower than preferred stock because of the liquidation preference and other preferential rights. A proper 409A valuation for an early-stage startup typically values common stock at 25-35% of the preferred price. For a pre-revenue startup, the cost is on the lower end ($3-5K through providers like Carta, Pulley, or AngelList). It's a necessary expense. The valuation is good for 12 months (or until a material event like a new funding round), so one valuation covers your initial option grants. Don't skip this — 409A penalties are severe and fall on your employees, not the company.