When issuing stock choices or structuring payment strategies, many founders encounter two important-yet typically misunderstood-terms: 409A Valuation and Fair Market Value (FMV). At a glance, they might seem interchangeable. In practice, they serve different legal, tax, and operational functions. Understanding the difference in between 409A vs FMV is essential for personal companies, especially start-ups, that wish to stay compliant and competitive.

In this guide, we'll break down:
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- What is a 409A evaluation?

• What is Fair Market Price (FMV)?
• How the IRS views each
• The relationship in between 409A and FMV
• Why the distinction matters for equity payment
• Common misconceptions and errors
• Best practices for start-ups
  
  Let's dive in.
  
  What Is a 409A Valuation?
  
  A 409A assessment is a formal, independent appraisal used to figure out the reasonable market worth of a private business's common stock. It gets its name from Section 409A of the Internal Revenue Code, which governs non-qualified deferred payment.
  
  Startups normally use a 409A valuation to set the strike price of stock options provided to staff members. Legally, the strike price must not be lower than the FMV of the underlying typical stock on the grant date. A 409A valuation assists ensure compliance with this rule.
  
  For business using Mantle's cap table management platform, the 409A evaluation can be streamlined for easy tracking and compliance.
  
  Key Features of a 409A Valuation:
  
  - Conducted by a third-party valuation company
• Required for independently held business releasing stock options
• Must be upgraded every 12 months or after a product occasion (e.g., fundraising, acquisition deal).
• Provides a "safe harbor" to secure business and staff members from IRS penalties
  
  For additional information on 409A evaluations, take a look at our guide.
  
  What Is Fair Market Price (FMV)?
  
  Fair Market Price (FMV) is a wider financial idea defined by the IRS as:
  
  " The price at which the residential or commercial property would change hands in between a willing purchaser and a ready seller, neither being under any obsession to buy or to offer and both having affordable knowledge of appropriate facts."
  
  FMV can be utilized in multiple contexts:
  
  - Sale of business shares or properties. - Gifting of equity for estate or tax preparation.
• Purchase of stock choices.
• Mergers and acquisitions
  
  While a 409A evaluation aims to establish FMV for compliance, not all FMV evaluations fulfill the standards required under 409A.
  
  409A Valuations vs. Fair Market Value: Key Differences
  
  Here's how 409A assessments vs. fair market value compare throughout essential areas:
  
  For a more detailed appearance at compliance and valuation dangers, take a look at our post on 409A valuation guide.
  
  How the IRS Views 409A Valuations vs. FMV
  
  The IRS utilizes 409A appraisals particularly to manage deferred settlement, such as stock options. If a company issues choices with a strike rate listed below FMV without a vlid 409A assessment, the comployee could face:
  
  - Immediate income tax on the postponed payment.
• An additional 20% charge tax.
• Interest charges on overdue taxes
  
  Safe Harbor Protection
  
  A certified 409A evaluation provides a safe harbor, shifting the problem of evidence to the IRS. To quality:
  
  - The valuation must be carried out by a certified independent appraiser.
• It needs to be less than 12 months old.
• There must have been no product modifications impacting the assessment.
  
  FMV, on the other hand, is a general concept used by the IRS in many tax-related scenarios-not simply equity settlement. which transfers of residential or commercial property are evaluated for tax purposes.
  
  Why the Distinction Between 409A and FMV Matters
  
  Understanding 409A assessments vs. fair market price is important for:
  
  - Issuing equity grants correctly.
• Avoiding costly IRS penalties.
• Preparing for audits, due diligence, and acquisitions.
• Planning tax methods for executives and staff members
  
  A common error is assuming the FMV equates to the most recent preferred stock rate. However, favored shares frequently bring liquidation choices and investor defenses, implying they deserve more than typical stock.
  
  A 409A Valuation accounts for:
  
  - Capital structure (common vs. preferred shares).
• Discount for lack of marketability (DLOM). - Financial performance and market comparables.
• Risk profile and organization phase
  
  Practical Example: VC Round vs. 409A Valuation
  
  Let's state your startup raises a Series A round at $10/share for . That evaluation includes financier rights that typical shares don't have.
  
  A correct 409A valuation may assess the FMV of common stock at $2.50/ share, reflecting:
  
  - Illiquidity of personal shares.
• Subordination to preferred stock.
• Risk profile for early-stage business
  
  Issuing options at $10/share rather of $2.50/ share could:
  
  - Trigger IRS examination.
• Deter workers from working out alternatives.
• Overstate settlement expense on your books
  
  When to Update Your 409A Valuation
  
  To maintain compliance, update your 409A assessment:
  
  A minimum of every 12 months. After any product occasion, such as: - New financing round.
• Acquisition deal.
• Major business pivot.
• Large earnings change
  
  Failing to upgrade your assessment can revoke your safe harbor status and expose the business to tax and legal danger.
  
  You can find more details on when to update your 409A assessment here.
  
  Common Mistakes Companies Make
  
  Counting On Internal FMV Estimates: These typically don't fulfill safe harbor standards and frequently lack documents. Confusing Preferred and Common Stock Valuation: Valuing common stock at the exact same cost as preferred can lead to overvaluation and compliance concerns. Skipping Updates After Major Events: Material modifications like fundraising rounds should trigger an appraisal upgrade. Granting Options Without a Valid 409A: Retroactive pricing can result in penalties and gross income for workers. Best Practices for Managing 409A Valuations and FMV
  
  - Deal with a reliable third-party valuation firm.
• Schedule appraisal updates yearly.
• Update after material occasions.
• Keep in-depth records of all grants and appraisals.
• Educate employees on how stock options and FMV work
  
  Final Thoughts: 409A Valuations vs. Fair Market Value
  
  While they're carefully associated, 409A valuations and fair market value are not interchangeable. FMV is the broader monetary concept, while a 409A appraisal is a specific, defensible method to identify FMV for releasing stock choices in personal companies.
  
  For start-ups, the safest path is to treat 409A appraisals as a legal and compliance requirement, and FMV as the foundation of sound equity planning. Understanding and handling both ensures you remain IRS-compliant, bring in leading talent, and keep transparency with investors and employees.
  
  Need aid with your next 409A evaluation or cap table management? See how Mantle can help improve compliance and equity management for you and your legal group.
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  More on 409A evaluations
  
  409A Valuations for Startups (2025 Guide): What Founders Need to Know.
  409A Valuation Cost Breakdown: What to Expect.
  How to Prepare for a 409A Valuation: A Step-by-Step Checklist.

Disclaimer: This article is provided as general info to clients and pals of Mantle. It must not be construed as, and does not constitute, financial, legal or tax guidance on any particular matter, and employers and employees need to always consult their professional consultants, accountants or attorneys as required when considering decisions or actions that may affect your organization or personal interests. Mantle does not presume any liability for reliance on the info in this blog site post.