When providing stock alternatives or structuring payment strategies, numerous founders experience 2 important-yet frequently misunderstood-terms: 409A Valuation and Fair Market Price (FMV). At a look, they may appear interchangeable. In practice, they serve various legal, tax, and operational functions. Understanding the difference between 409A vs FMV is important for personal companies, particularly start-ups, that want to remain certified and competitive.

In this guide, we'll break down:

- What is a 409A assessment?

• What is Fair Market Value (FMV)?
• How the IRS views each
• The relationship between 409A and FMV
• Why the distinction matters for equity compensation
• Common mistaken beliefs and errors
• Best practices for start-ups
  
  Let's dive in.
  
  What Is a 409A Valuation?
  
  A 409A evaluation is a formal, independent appraisal used to figure out the fair market value of a personal company's typical stock. It gets its name from Section 409A of the Internal Revenue Code, which governs non-qualified delayed settlement.
  
  Startups normally utilize a 409A appraisal to set the strike price of stock alternatives released to staff members. Legally, the strike rate need to not be lower than the FMV of the underlying typical stock on the grant date. A 409A valuation helps guarantee compliance with this rule.
  
  For companies using Mantle's cap table management platform, the 409A assessment can be streamlined for simple tracking and compliance.
  
  Key Features of a 409A Valuation:
  
  - Conducted by a third-party appraisal company - Required for privately held business releasing stock options
• Must be upgraded every 12 months or after a product event (e.g., fundraising, acquisition offer).
• Provides a "safe harbor" to protect companies and employees from IRS penalties
  
  For more information on 409A appraisals, have a look at our guide.
  
  What Is Fair Market Price (FMV)?
  
  Fair Market Value (FMV) is a wider monetary principle specified by the IRS as:
  
  " The rate at which the residential or commercial property would change hands in between a ready purchaser and a willing seller, neither being under any compulsion to buy or to offer and both having reasonable knowledge of relevant truths."
  
  FMV can be used in several contexts:
  
  - Sale of business shares or assets.
• Gifting of equity for estate or tax preparation. - Purchase of stock alternatives.
• Mergers and acquisitions
  
  While a 409A appraisal intends to establish FMV for compliance, not all FMV assessments meet the requirements needed under 409A.
  
  409A vs. Fair Market Price: Key Differences
  
  Here's how 409A appraisals vs. reasonable market worth compare throughout key locations:
  
  For a more detailed take a look at compliance and assessment dangers, have a look at our post on 409A assessment guide.
  
  How the IRS Views 409A Valuations vs. FMV
  
  The IRS utilizes 409A appraisals particularly to control deferred compensation, such as stock options. If a company concerns choices with a strike price listed below FMV without a vlid 409A appraisal, the comployee could deal with:
  
  - Immediate earnings tax on the delayed payment.
• An additional 20% charge tax.
• Interest charges on overdue taxes
  
  Safe Harbor Protection
  
  A certified 409A valuation offers a safe harbor, shifting the problem of evidence to the IRS. To quality:
  
  - The assessment must be performed by a qualified independent appraiser.
• It needs to be less than 12 months old.
• There need to have been no product modifications affecting the valuation.
  
  FMV, on the other hand, is a basic idea used by the IRS in numerous tax-related scenarios-not simply equity compensation. which transfers of residential or commercial property are judged for tax purposes.
  
  Why the Distinction Between 409A and FMV Matters
  
  Understanding 409A valuations vs. fair market price is crucial for:
  
  - Issuing equity grants correctly.
• Avoiding costly IRS penalties.
• Preparing for audits, due diligence, and acquisitions.
• Planning tax strategies for executives and staff members
  
  A common error is assuming the FMV equates to the current preferred stock price. However, preferred shares typically bring liquidation preferences and investor securities, implying they are worth more than common stock.
  
  A 409A Valuation represent:
  
  - Capital structure (common vs. favored shares).
• Discount for absence of marketability (DLOM).
• Financial performance and market comparables.
• Risk profile and business phase
  
  Practical Example: VC Round vs. 409A Valuation
  
  Let's state your start-up raises a Series A round at $10/share for preferred stock. That assessment includes financier rights that typical shares don't have.
  
  An appropriate 409A evaluation might examine the FMV of typical stock at $2.50/ share, showing:
  
  - Illiquidity of personal shares.
• Subordination to preferred stock.
• Risk profile for early-stage business
  
  Issuing alternatives at $10/share rather of $2.50/ share might:
  
  - Trigger IRS analysis.
• Deter workers from exercising options.
• Overstate settlement cost on your books
  
  When to Update Your 409A Valuation
  
  To maintain compliance, upgrade your 409A evaluation:
  
  A minimum of every 12 months. After any material event, such as: - New funding round.
• Acquisition deal.
• Major service pivot.
• Large income modification
  
  Failing to update your assessment can invalidate your safe harbor status and expose the business to tax and legal danger.
  
  You can find more details on when to upgrade your 409A evaluation here.
  
  Common Mistakes Companies Make
  
  Depending On Internal FMV Estimates: These usually don't meet safe harbor requirements and frequently lack documentation. Confusing Preferred and Common Stock Valuation: Valuing common stock at the exact same cost as chosen can result in overvaluation and compliance problems. Skipping Updates After Major Events: Material changes like fundraising rounds must trigger a valuation upgrade. Granting Options Without a Valid 409A: Retroactive pricing can result in charges and taxable earnings for staff members. Best Practices for Managing 409A Valuations and FMV
  
  - Work with a trustworthy third-party valuation company.
• Schedule assessment updates each year.
• Update after material occasions.
• Keep in-depth records of all grants and assessments.
• Educate employees on how stock options and FMV work
  
  Final Thoughts: 409A Valuations vs. Fair Market Value
  
  While they're carefully associated, 409A valuations and reasonable market price are not interchangeable. FMV is the wider financial idea, while a 409A evaluation is a specific, defensible approach to identify FMV for providing stock choices in private business.
  
  For startups, the best route is to deal with 409A appraisals as a legal and compliance requirement, and FMV as the foundation of sound equity planning. Understanding and handling both guarantees you stay IRS-compliant, draw in top skill, and preserve openness with investors and staff members.
  
  Need assistance with your next 409A valuation or cap table management? See how Mantle can assist enhance 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 Step-by-Step Checklist.
  Disclaimer: This article is supplied as basic details to clients and good friends of Mantle. It needs to not be interpreted as, and does not constitute, financial, legal or tax guidance on any particular matter, and employers and workers must always consult their professional consultants, accountants or lawyers as needed when thinking about choices or actions that might affect your company or individual interests. Mantle does not assume any liability for dependence on the details in this post.