How long are 409A valuations good for?
Takeaway: A 409A valuation is legally presumed to be reasonable for a maximum of 12 months, but this "safe harbor" can be cut short by any "material event" that could change your company's value, such as a new financing round.
A common and dangerous misconception among founders is that a 409A valuation is a one-time event. In reality, it is a recurring compliance requirement with a specific and limited shelf life. Using an expired or "stale" 409A valuation to set the exercise price for new stock option grants can expose your employees to the same severe tax penalties under Section 409A as having no valuation at all.
Understanding the lifespan of your 409A valuation is critical for maintaining a compliant equity compensation program. The rules are governed by a combination of a fixed time limit and the occurrence of significant business events.
The 12-Month Safe Harbor
The IRS regulations provide a formal "safe harbor" for your valuation. This means that the valuation is presumed to be reasonable for a period of no more than 12 months from the date of the valuation report.
This creates a simple rule of thumb: you must refresh your 409A valuation at least once a year. If your last valuation was dated May 1, 2024, it expires on April 30, 2025. You cannot use it to grant options on May 1, 2025. This annual refresh is a standard part of a startup's operational calendar.
The "Material Event" Trigger
The 12-month clock is not the only factor. A valuation can become stale much sooner if the company experiences a "material event." A material event is any event that could reasonably be expected to have a significant impact on the value of your company's stock. If a material event occurs, your existing 409A valuation is no longer valid, and you must obtain a new one before granting any further options, even if it has been less than 12 months since your last report.
The most common and clear-cut material event is raising a new round of financing.
Example:
You get a 409A valuation done on January 1st.
On April 1st, you close a Series A financing at a significantly higher valuation.
Your January 1st valuation is now obsolete. The price paid by the new investors is a material new piece of information that must be incorporated into a new valuation. You must get a new 409A valuation dated after April 1st before you can grant any new options to the employees you plan to hire with your Series A funding.
Other potential material events can include a major strategic partnership, a significant product breakthrough, or a major shift in your financial outlook.
The rule is simple: grant options regularly, and refresh your 409A valuation regularly. At a minimum, this means getting a new valuation every 12 months. More importantly, it means getting a new valuation immediately following any significant event, especially a new financing, that materially changes the value of your company.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.