What every startup founder needs to know about 409A valuations

What every startup founder needs to know about 409A valuations

Author: Christine Ngo
Read time:  3 minutes
Published date:  15 June 2022
A 409A valuation is an important (and legally required) step for startups. Learn what founders should ask before updating their 409A in a volatile market.

The 409A valuation process may not be the most exciting thing on a startup founder’s to-do list, but it’s critical to your company’s long-term success. You can’t offer equity to employees without it, and you need to update it at least once a year. 

With economic conditions constantly changing, you might also need to consider updating your 409A even if you aren’t “due” yet.

In this article, we’ll walk you through some key considerations for founders as they navigate their 409A. You can also learn what a 409A valuation is or download a sample 409A report before getting started.

Download a free sample 409A report

Should you update your 409A because of the changing market?

So is the changing market a material event for your company? A lot of variables can impact your valuation—including financing terms, the macroeconomic environment, and public market volatility. 

Uncertainty in the public markets is likely to have an especially dampening effect on venture financings and valuations, with investors reconsidering their appetites for risk. Based on Carta data, companies have delayed plans for an IPO or have seen their own 409A valuations decline. This change in the market might be an opportunity to grant options at a lower strike price (though that may not happen for every company). Recently, Instacart slashed its own 409A valuation significantly—from $39 billion to $24 billion.

Here are five questions for founders and management to ask during market uncertainty:

1. Did you raise capital in late 2021 or early 2022?

The market conditions in late 2021 to early 2022 were significantly more favorable than they are today. If you raised capital during this period, you may be eligible for an equity adjustment that could potentially lower your valuation.

2. Have you made significant changes to your forecasts?

Most companies will be affected by a prolonged downturn. Your finance team may be preparing revised forecasts. As you reforecast, it’s often appropriate to reassess your value to account for these changes.

3. Are you considering raising capital in the foreseeable future? 

If you’ve been planning to raise capital this year, you might be facing a dwindling cash balance at a time when capital is either expensive or (potentially) unavailable.

4. Are you slowing down your cash burn given the funding market?  

If you have less available cash, you may need to be reassessed for the risk associated with limited funding.

5. Are you planning an exit in the next 12 months? 

The road from private to public is taking a lot longer as the IPO market has slowed due to market volatility. You’ll likely need to revisit any assumptions you’ve made about the expected time to exit—especially if you operate in an industry that’s seen a significant decline in the public stock market, like technology.

How startup founders can navigate the 409A process

There’s no “one size fits all” recommendation for your 409A valuation strategy. Every company and scenario is different. With everything going on in the market, it’s a good time to talk to your valuation provider and legal advisors about whether it makes sense to update your 409A valuation now.

Carta has valued hundreds of billions of dollars worth of assets for companies. If you’re a Carta cap table customer, 409A valuations are included in your subscription on an annual basis and after material events.

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Christine Ngo leads operations for the Carta Valuations team. She has spent her career valuing venture-backed private companies and is passionate about democratizing valuations for founders.
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