Your option strike is locked to your grant-date 409A
A 409A sets the minimum strike for options granted that day; later refreshes do not rewrite your existing grant.
The trap: a company sends a new 409A notice, and you assume your stock option strike price changed. The rule: for an employee, the strike price is fixed at the 409A value that exists on the grant date, and that fixed price does not move upward when the company later obtains a higher 409A valuation. A 409A is an independent appraisal of a private company's common stock, and the label refers to Section 409A of the US Internal Revenue Code. IRS rules require a company to price new stock options at no less than the common-stock fair market value determined on the grant date.
A new 409A measures the company, not your old grant
A company is required to refresh its 409A valuation no less than once every 12 months, and it must do so earlier when a material event, such as a funding round or acquisition offer, occurs. The new number is a fresh measurement of common stock, not a correction to your old grant.
A 409A appraisal can give the company safe harbor status, which means the IRS presumes the valuation is reasonable unless the agency can demonstrate that it is grossly unreasonable. That presumption gives the company a practical reason to rely on the appraisal for future grants. For grants made after the valuation date, the new number can become the grant-date fair market value that sets the minimum strike.
A below-FMV strike is a tax trap
If a company grants options below the 409A fair market value, the resulting income can be treated as immediately taxable deferred compensation and may incur a 20% penalty tax, regular income taxes, and interest. That exposure is why a below-FMV strike creates a tax trap, not a discount.
For your existing grant, the relevant question is whether the strike was at or above the fair market value on the grant date. If it was, the later 409A number does not create that trap for you.
A lower 409A can change the valuation, not your strike
During the 2022 tech downturn, some companies experienced 409A valuations falling from 50x revenue multiples in 2021 to 15x revenue multiples. A drop like that can make a later 409A number look much smaller than the price on an older grant.
If your grant date came before the drop, your strike may sit above the later valuation. That does not mean your grant is broken. It only shows that the company's later 409A number is different from the grant-date number.
The direction of the 409A can affect how the company prices future grants, because new options must be priced at the grant-date fair market value. You can see the difference by comparing the grant-date number with the later number.
Your grant-date number is the one to check
You do not need to read the full appraisal to answer the basic question of whether your grant was priced at the required minimum on the day it was granted. Ask for the 409A common-stock fair market value on your option grant date, then compare it with the strike price in your grant agreement.
- Find your grant date.
- Find the 409A common-stock fair market value on that date.
- Find your strike price.
- Check whether the strike equals or exceeds that value.
If the strike equals or exceeds that value, the grant was priced at the required minimum. If the strike is below that value, ask the company to explain the tax treatment before you exercise the options. Keep the grant agreement, the grant-date 409A number, and the strike price together. With those three pieces, you can tell whether your grant was priced at the required minimum.
