Common Mistakes Founders Make With 409A (and How to Avoid Them)

409A valuations protect startups, but founders often make mistakes that lead to compliance trouble. Here are the most common ones:

1️⃣ Not getting a 409A before granting ESOPs

Granting stock options without a valid valuation exposes employees to IRS penalties—not worth the risk.

2️⃣ Using internal or CA-made valuations

409A must be done by an independent third-party. Internal valuations don’t qualify for safe-harbor.

3️⃣ Not updating after fundraising

If you raise capital and continue using the old valuation, it’s invalid.

4️⃣ Assuming preferred share price = common share price

Preferred shares have rights; common shares don’t.
Common stock FMV is always lower.

5️⃣ Not keeping financials updated

Accurate data = accurate valuation.

6️⃣ Using cheap, low-quality valuation firms

If the report isn’t audit-ready, your company is at risk during due diligence or IRS review.

Avoid these mistakes and your fundraising, audits, and ESOP processes will be smoother and safer.