Product Education

Carta has optimized 409A valuations for early-stage startups

August 28, 2023
Christine Ngo

Early-stage founders have a lot on their plate: Hiring the right employees, scaling a business, and finding product-market fit can be all-consuming. As a result, maintaining an up-to-date 409A valuation can sometimes fall to the wayside.

But obtaining a new 409A on an annual basis—and following any material event, like a primary fundraise—is required for a startup to remain within IRS safe harbor guidelines. If a startup loses safe harbor status by failing to maintain an up-to-date 409A valuation when issuing options, the IRS can hold the company’s employees responsible for paying additional tax penalties if it is found that the company issued options below fair market value (also known as “discounted” options). And the additional state and local penalties can be pretty harsh

Poor 409A hygiene can follow a startup and create due diligence challenges during an acquisition or IPO. That’s why Carta’s valuation analysts help startups attain a price that accurately reflects a company’s FMV to benefit option holders in the near term, as well as withstand scrutiny from auditors or other third parties years later, when nearing an exit.

Carta’s early-stage benchmarks help founders understand how their shares are valued in a transparent 409A valuation report by using a proprietary formula that leverages data from more than 39,000 privately-owned companies. 

What to expect:

Streamlined workflow: When you’re ready to request a 409A, simply click on “409A Valuations” in the “Compliance & Tax” tab on the left side of Carta’s navigation screen, then choose “Get started.” You’ll then be asked to enter some relevant financial information and other specific traits about your startup.

Data-driven analysis: Carta’s valuation analysts use aggregate fundraising data and compare your startup’s age, industry, and cash raised against your competitors to help determine the startup’s equity value and probability of success. This helps founders better understand the impacts of the macroeconomic environment on their companies, and communicates to employees the value of their shares. As your company grows, Carta offers dedicated support and produces sophisticated analysis to meet increased 409A reporting demands.

Fast delivery, robust support: Our in-house analysts can deliver a 409A valuation in one to two business days for most early-stage companies. We’re also on call to answer questions about factors that may impact your 409A valuation, such as past financings, industry, or company stage. We’ll work with you to deliver a defensible FMV that will help you do right by your employees.

Sample 409A report

In the downloadable sample 409A report (see below), Carta’s valuation analysts explain how they evaluate two scenarios: One where the startup successfully raises its next financing round and another when it does not. 

For each, the four-step benchmarking analysis includes:

  • Explaining how the report was prepared

  • Determining which FMV scenario was used

  • Calculating the probability of success

  • Offering an audit-ready FMV

Download the sample 409A report