409A Revaluations: What Triggers Them and Why Strike Prices Change Between Rounds

Your grant letter from January 2025 sets a strike of $11 per share. Your new grant in November 2025 prices at $18. Your coworker hired in July 2025 got $14. Three strike prices in one year reflect three different 409A valuations. Each was current on the grant date, each satisfies IRS safe harbor, and each reflects a different point in the company’s trajectory.

A 409A valuation establishes the fair market value of a company’s common stock for IRS purposes under Section 409A of the Internal Revenue Code. It governs the strike price of stock option grants and the measurement of deferred compensation. If your strike is below 409A fair value, the grant is treated as deferred compensation with immediate income inclusion, a 20% penalty tax, and interest. To avoid that, companies price grants at the current 409A.

This guide walks through when companies must refresh 409A, how safe-harbor rules work, and what changing strike prices across grants actually tells you about the company.

The 12-month safe harbor

Section 409A regulations provide a safe harbor for “presumed reasonable” valuations. If a private company uses a qualified independent appraisal prepared within the last 12 months and no material event has occurred since, the valuation is presumptively reasonable for grants issued during that window.

The safe harbor is a presumption, not an absolute shield. The IRS can rebut it if the valuation is proven “grossly unreasonable.” In practice, no court case has rebutted a well-documented 409A, and the safe harbor is treated as a hard rule by almost all companies.

When the 12 months expires, the company must commission a fresh 409A before issuing new grants. Most late-stage companies renew 409A annually on a calendar or fiscal schedule.

Material-event triggers that force a revaluation

A material event restarts the 12-month clock. The most common triggers:

Priced equity round

Any priced financing (Series A, B, C, D, E, bridge, growth equity round) is a material event. The preferred price and associated transaction terms feed into the common-stock valuation model. A priced round always triggers a new 409A, usually delivered within 60-90 days of round close.

Significant secondary tender or buyback

A company-run tender offer at a defined price is a market signal about common-stock value. Companies doing structured tenders typically trigger a 409A revaluation either before the tender (to set a defensible price floor) or shortly after (to reflect the clearing price).

Convertible note or SAFE issuance above a threshold

Materials instruments that will convert into equity count as material events when the amount is significant relative to the cap table. A $100 million SAFE at a $2 billion cap is material; a $2 million founder-friends-and-family round usually is not.

Major corporate transaction

M&A discussions that reach a stage with term sheets, significant partnership or commercial deals that materially change revenue trajectory, and pivots away from or into regulated markets all qualify. Some companies also treat a major customer loss or a significant regulatory event as material.

IPO path decisions

Filing confidential S-1 draft, signing engagement letters with underwriters, or setting a target IPO date can trigger a revaluation because the exit-probability weights in the 409A model shift materially.

What actually changes in a revaluation

A 409A valuation firm uses either Option Pricing Model (OPM), Probability-Weighted Expected Return Model (PWERM), or a hybrid. The inputs that shift most across valuations:

The preferred-to-common ratio

If a new priced round raised the preferred price from $22 to $30, the common-stock value usually moves up proportionally, subject to DLOM and probability weights. A round at the same preferred price but with new rights (participation, senior preference) can push common down even if preferred price is flat.

Probability weights on exit paths

A company that just hired bankers and targeted Q3 IPO has higher IPO-weighting in its PWERM model. Higher IPO weight usually pushes common value up because IPO outcomes convert preferred to common, reducing the preference-stack drag.

DLOM band

Discount for lack of marketability typically runs 15-30%. Early-stage companies and those far from liquidity sit at the high end. Late-stage companies with a clear IPO path sit at the low end. DLOM narrows as liquidity approaches.

Volatility assumption

OPM inputs include volatility of the underlying. Higher volatility pushes option-value of common (which has a call-option-like payoff above the preference stack) higher. Fresh volatility data from public comps updates this input.

What changing strike prices tell you

Three patterns to watch:

Rising strike across close-in-time grants

If you and a new hire got grants two months apart and the new hire’s strike is significantly higher, a material event happened in between. Usually a priced round or a tender offer at a premium. This is a positive signal.

Falling strike

Down round, significant customer loss, unexpected burn, or a material negative event forced revaluation at a lower fair value. Less common but happens in distressed or slow-growth environments. Your old grants are still at the old strike; your new grants are cheaper, which is good for your new grants’ upside but usually reflects trouble.

Strike stuck at the same price for 12+ months

No material events forced a revaluation, and the 12-month clock simply cycled. This can mean steady-state operations or a company deferring a revaluation because the direction (up or down) is unclear.

How 409A interacts with ISOs and NSOs

Under IRC §422, an ISO must be granted at or above fair market value. If strike is below FMV at grant, the option fails to qualify as an ISO and converts to an NSO. Since 409A establishes FMV for this purpose, granting ISOs requires a current 409A.

NSOs granted below FMV face Section 409A penalties: the spread at grant is deferred compensation, taxable at vest, plus 20% penalty tax plus interest. No company grants NSOs below 409A; doing so is a serious tax mistake.

Early-exercise pricing

If your plan allows early exercise of unvested options, the price is the strike (set at 409A) regardless of the current 409A when you exercise. Early-exercise decisions depend on where the current 409A is relative to strike and your assessment of growth trajectory. See the ISO exercise strategy article for the full framework.

The lag problem

409A valuations are snapshots, usually with a data cutoff 30-60 days before issuance. If your company raised a round in March and the 409A is delivered in May, the valuation reflects March-and-earlier data. If something changed in April, the 409A does not reflect it.

This lag explains why companies do not always revalue immediately after a material event. The valuation firm needs a stable data window. A 409A delivered two weeks after a round often feels stale by the time new grants are priced.

Frequently asked

Can I see the 409A report?

Usually no. 409A reports contain confidential company data and are typically shared only with the CFO, external auditors, and the board. You are entitled to know the fair-market-value-per-share conclusion, which is usually posted on your equity portal as the current 409A price.

Does a revaluation change my existing strike price?

No. Grants retain the strike set at the original grant date. A revaluation affects new grants only. Repricing existing grants requires shareholder approval and triggers accounting expense under ASC 718, so companies almost never do it.

Why did my strike jump when I accepted my offer two months after signing?

Offer letters typically state that the strike is set at 409A on the board-approval date of the grant, not the offer date. A material event between offer and grant can push strike higher. Ask your equity team to confirm your grant date aligns with an advantageous 409A if you can.

Does the company benefit from a low 409A?

Lower 409A means lower strike on employee grants, which gives employees more potential upside. It also means lower expense recognition under ASC 718, which is a minor P&L benefit. Companies do not aggressively push for low 409A because the safe harbor requires independent valuation; gaming it creates audit and IRS risk.

What happens at IPO?

At IPO, 409A stops being the reference price. Grants issued after the IPO price at the public market price per share. The day before IPO, 409A is sometimes set close to the expected IPO range.

Next step

Check your equity portal for the current 409A price per share and the effective date of the most recent valuation. Note the effective date. If you know of a material event (financing, tender offer, major strategic deal) that has happened since, expect a new 409A in the next 60-90 days and any new grants to reflect the refreshed price.