Founder stock and valuation

The 409A valuation is the most important number in your financial plan that you probably haven't modeled.

Every time your company issues options, it needs an independent valuation of its common stock — the 409A. That number sets the option strike price, determines the FMV for gift transfers, drives the economics of estate planning tools like GRATs, and defines the cost basis for ISO exercises. For founders, the 409A is not an HR compliance detail. It is the anchor for the most time-sensitive financial planning decisions in a company's life cycle.

What a 409A valuation is

IRC § 409A requires companies to issue options at fair market value to avoid immediate income taxation and a 20% excise tax penalty on option holders.¹ The safe harbor for establishing FMV is a valuation by an independent appraisal firm using accepted methods (income approach, market approach, or both). Most VC-backed companies obtain a new 409A at least annually and after each material event — typically within 60–90 days of a funding round closing.

The 409A appraises the common stock, not the company's headline enterprise value. The appraiser applies a discount for:

• Liquidation preferences: Preferred shareholders receive their preference before common participates in proceeds.
• Lack of marketability: Common shares are illiquid private securities with transfer restrictions and no ready market.
• Lack of control: Common stockholders, even founders, cannot force a liquidity event unilaterally.

The 409A-to-preferred-price discount

At early stages, the discount between 409A common value and the preferred round price is typically large. At seed and Series A, common might be valued at 10–20 cents on the dollar relative to the preferred price. At later stages, as liquidation preferences become less dominant relative to total proceeds and a liquidity event is nearer, the discount compresses — Series C and beyond often sees 409A at 30–60% of preferred.

These ratios are approximations and vary by company, investor structure, and economic conditions. Your actual 409A is documented in the valuation report; get a copy from the company.

Why the 409A matters for founders specifically

If you are a common stockholder — not an option holder — the 409A still governs several of the most important financial planning decisions you face before a liquidity event.

1. Gift transfers: the lower the 409A, the more leverage

When you gift founder stock to a family member, a trust, or a donor-advised fund, the IRS uses FMV at the date of gift — which for private company common stock is anchored to the most recent 409A valuation. If the company's preferred round price is $20/share but the 409A appraised common at $3/share, you can gift that stock at the $3/share value, using only $3 of your gift tax exemption per share gifted.²

If that stock is later sold in an acquisition at $18/share, your gift recipient realizes the gain, not you. You transferred $15/share of future appreciation out of your estate at a $3/share gift tax cost. Early-stage gifting — when the 409A is lowest relative to long-term potential — produces the most leverage per dollar of exemption used.

2. GRATs: the §7520 hurdle rate is the only bar to clear

A grantor retained annuity trust (GRAT) transfers appreciation above the IRS §7520 rate out of your estate without using gift exemption. You transfer stock into the GRAT at current 409A FMV, receive annuity payments back over the trust term, and if the stock appreciates faster than the §7520 rate, the excess passes to beneficiaries gift-tax free.³

The §7520 rate in June 2026 is 5.0%.⁴ Founder stock growing from a post-Series A 409A to a post-Series C 409A over a 2–3 year GRAT term can easily outperform a 5% hurdle. The GRAT works because the 409A at the time of transfer is the benchmark — not the preferred price. The lower the 409A relative to where you expect the company to go, the more value the GRAT can move.

One important constraint: because GRATs involve a grantor trust, QSBS exclusion is generally not available on gains inside the GRAT itself — the §1202(h) gift rules require the donee to be an individual taxpayer, and the GRAT grantor is treated as continuing to own the stock for QSBS purposes. Work with a tax attorney who understands both the estate planning and the QSBS interaction before transferring qualifying stock.⁵

3. Option exercise decisions

If you received ISO grants in addition to your restricted founder stock — common for founders who also hold an executive role from early grants — the option strike price equals the 409A at the date of grant. Exercising those ISOs early converts any appreciation above the strike from ordinary income into potential long-term capital gain treatment. The spread at exercise (409A current FMV minus strike price) is still an AMT preference item, but the trade-off improves meaningfully when the 409A is low relative to expected exit value.

The 2026 AMT exemption is $90,100 (single) / $140,200 (MFJ), with phaseout beginning at $643,000 / $1,210,500.⁶ If the ISO spread at exercise is modest and your AMT income is within or near the exemption range, early exercise can make economic sense. If the spread is large relative to AMT thresholds, early exercise creates a real cash tax event. Model the scenario with a tax advisor before exercising.

4. Timing charitable gifts before a deal becomes "substantially certain"

Contributing appreciated stock to a donor-advised fund or charitable remainder trust before a binding acquisition agreement creates a charitable deduction at FMV (the 409A) with no capital gain recognized. The IRS scrutinizes donations made after a letter of intent is signed under the "anticipatory assignment of income" doctrine — earlier is cleaner.⁷ The 409A FMV at donation is the deduction anchor; if you contribute pre-Series C stock at a low 409A and the company sells at a high price shortly after, the charitable deduction is fixed at the 409A transfer date, not the ultimate proceeds.

When the 409A is updated — and why the window closes

A company typically obtains a new 409A:

• Within 60–90 days of a new funding round closing
• When 12 months have passed since the last valuation
• After any material event — a material change in business prospects, a new secondary sale at a materially different price, a significant change in the balance sheet, or the start of an M&A process

The practical implication: once a company formally begins an M&A process or files an S-1, the 409A either gets refreshed at a higher value reflecting the expected event, or the company may simply use the deal price as the relevant FMV. Either way, the low-409A gifting and estate planning window that existed at earlier stages closes. If you intend to use gifting, GRATs, or charitable strategies based on a low 409A FMV, those actions need to happen before the deal timeline begins to drive the valuation upward.

How founders lose the 409A advantage without realizing it

The most common mistake is recognizing that gifting and estate planning are valuable but waiting until the deal is imminent to engage an advisor. By the time a letter of intent arrives, three things have typically happened:

1. The 409A has been refreshed at a value approaching the deal price
2. Transfer restrictions from the company or investors make last-minute gifting administratively difficult or impossible to complete before close
3. The IRS assignment-of-income risk on charitable gifts has materialized, limiting the tax benefit

The window for maximum gifting leverage — when the 409A is still well below exit value — is years before the event, not weeks.

What a financial advisor does with the 409A

A fee-only financial advisor who understands founder equity uses the 409A as the starting point for a personal balance sheet model. The model estimates your likely range of after-tax proceeds across different exit scenarios, identifies how much wealth can be moved out of your taxable estate using today's low-409A gifting opportunities, and sizes the GRAT, trust, or DAF strategy to your specific situation — before the window closes.

This analysis connects to the pre-liquidity estate planning guide and the after-tax liquidity calculator. Both assume you understand where your 409A stands relative to expected exit value.

Getting a copy of your 409A report

The 409A report is the company's document, prepared for its own safe-harbor compliance. There is no legal obligation to share it with individual stockholders, though many companies make it available upon request to founders and key employees. If your company does not provide it directly, ask your CFO or general counsel for the most recent appraised common stock value per share — the underlying number even if not the full report.