When providing stock choices or structuring settlement strategies, numerous creators come across 2 important-yet often misunderstood-terms: 409A Valuation and Fair Market Value (FMV). At a glance, they may appear interchangeable. In practice, they serve various legal, tax, and operational functions. Understanding the difference in between 409A vs FMV is vital for private business, specifically start-ups, that want to stay certified and competitive.
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In this guide, we'll break down:

- What is a 409A appraisal?

• What is Fair Market Value (FMV)?
• How the IRS views each
• The relationship between 409A and FMV
• Why the difference matters for equity compensation
• Common misconceptions and mistakes
• Best practices for start-ups
  
  Let's dive in.
  
  What Is a 409A Valuation?
  
  A 409A assessment is an official, independent appraisal used to figure out the reasonable market price of a private company's typical stock. It gets its name from Section 409A of the Internal Revenue Code, which governs non-qualified postponed compensation.
  
  Startups usually utilize a 409A valuation to set the strike cost of stock alternatives provided to employees. Legally, the strike price must not be lower than the FMV of the underlying common stock on the grant date. A 409A assessment helps ensure compliance with this rule.
  
  For companies utilizing Mantle's cap table management platform, the 409A appraisal can be structured for simple tracking and compliance.
  
  Key Features of a 409A Valuation:
  
  - Conducted by a third-party evaluation company
• Required for independently held business providing stock options
• Must be upgraded every 12 months or after a material occasion (e.g., fundraising, acquisition offer).
• Provides a "safe harbor" to safeguard business and workers from IRS charges
  
  To learn more on 409A valuations, have a look at our guide.
  
  What Is Fair Market Value (FMV)?
  
  Fair Market Value (FMV) is a broader financial principle specified by the IRS as:
  
  " The rate at which the residential or commercial property would alter hands in between a willing purchaser and a willing seller, neither being under any obsession to purchase or to sell and both having sensible knowledge of relevant facts."
  
  FMV can be utilized in numerous contexts:
  
  - Sale of company shares or properties.
• Gifting of equity for estate or tax preparation.
• Purchase of stock choices.
• Mergers and acquisitions
  
  While a 409A valuation aims to establish FMV for compliance, not all FMV assessments fulfill the standards needed under 409A.
  
  409A Valuations vs. Fair Market Price: Key Differences
  
  Here's how 409A evaluations vs. fair market price compare across crucial locations:
  
  For a more in-depth take a look at compliance and appraisal threats, have a look at our post on 409A appraisal guide.
  
  How the IRS Views 409A Valuations vs. FMV
  
  The IRS uses 409A appraisals specifically to manage deferred compensation, such as stock choices. If a business issues options with a strike cost listed below FMV without a vlid 409A assessment, the comployee could face:
  
  - Immediate earnings tax on the delayed settlement.
• An extra 20% penalty tax.
• Interest charges on overdue taxes
  
  Safe Harbor Protection
  
  A compliant 409A assessment supplies a safe harbor, shifting the burden of evidence to the IRS. To quality:
  
  - The evaluation should be performed by a qualified independent appraiser.
• It needs to be less than 12 months old.
• There should have been no material modifications affecting the valuation.
  
  FMV, on the other hand, is a basic idea utilized by the IRS in numerous tax-related scenarios-not just equity payment. which transfers of residential or commercial property are evaluated for tax purposes.
  
  Why the Distinction Between 409A and FMV Matters
  
  Understanding 409A valuations vs. reasonable market value is critical for:
  
  - Issuing equity grants correctly.
• Avoiding expensive 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 current favored stock cost. However, preferred shares typically bring liquidation preferences and investor securities, indicating they deserve more than typical 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 business stage
  
  Practical Example: VC Round vs. 409A Valuation
  
  Let's state your start-up raises a Series A round at $10/share for favored stock. That appraisal includes financier rights that common shares don't have.
  
  A proper 409A appraisal may evaluate the FMV of common stock at $2.50/ share, reflecting:
  
  - Illiquidity of personal shares.
• Subordination to favored stock.
• Risk profile for early-stage business
  
  Issuing choices at $10/share instead of $2.50/ share could:
  
  - Trigger IRS examination.
• Deter workers from working out options.
• Overstate compensation cost on your books
  
  When to Update Your 409A Valuation
  
  To maintain compliance, upgrade your 409A appraisal:
  
  A minimum of every 12 months. After any product event, such as: - New financing round.
• Acquisition offer.
• Major organization pivot.
• Large revenue change
  
  Failing to update your valuation can invalidate your safe harbor status and expose the company to tax and legal danger.
  
  You can find more details on when to update your 409A assessment here.
  
  Common Mistakes Companies Make
  
  Depending On Internal FMV Estimates: These generally do not fulfill safe harbor standards and frequently do not have documents. Confusing Preferred and Common Stock Valuation: stock at the very same rate as preferred can result in overvaluation and compliance issues. Skipping Updates After Major Events: Material modifications like fundraising rounds must set off an appraisal update. Granting Options Without a Legitimate 409A: Retroactive pricing can result in charges and gross income for staff members. Best Practices for Managing 409A Valuations and FMV
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  - Work with a credible third-party evaluation company.
• Schedule evaluation updates annually.
• Update after material events.
• Keep detailed records of all grants and valuations.
• Educate employees on how stock choices and FMV work
  
  Final Thoughts: 409A Valuations vs. Fair Market Price
  
  While they're closely associated, 409A valuations and fair market value are not interchangeable. FMV is the more comprehensive financial concept, while a 409A assessment is a particular, defensible method to identify FMV for releasing stock choices in personal 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 preparation. Understanding and managing both guarantees you stay IRS-compliant, attract top skill, and maintain openness with investors and employees.
  
  Need aid with your next 409A assessment or cap table management? See how Mantle can help streamline compliance and equity management for you and your legal group.
  
  More on 409A appraisals
  
  409A Valuations for Startups (2025 Guide): What Founders Need to Know.
  409A Valuation Cost Breakdown: What to Expect.
  How to Get ready for a 409A Valuation: A Detailed Checklist.

Disclaimer: This article is offered as general details to clients and buddies of Mantle. It should not be construed as, and does not constitute, monetary, legal or tax advice on any specific matter, and employers and employees ought to always consult their professional consultants, accountants or lawyers as needed when thinking about choices or actions that might impact your business or personal interests. Mantle does not assume any liability for dependence on the details in this blog site post.