409A Audit-Readiness Checklist: 15 Items Your Auditor Will Check

☐ 1. Engagement letter or mandate

Clear specification of purpose (IRC §409A), standard of value (FMV), and valuation date. Your auditor must confirm the scope matches the purpose for which the company is using it.

☐ 2. Valuator qualifications

Credentials (CPA, CFA, ASA, ABV), relevant experience, and independence confirmation. The valuator must meet IRC §409A "qualified individual" requirements.

☐ 3. Independence declaration

Written statement confirming the valuator has no financial interest in the outcome and has not been influenced by the client regarding the conclusion.

☐ 4. Company overview & business description

Industry, stage, products/services, customers, revenue model, competitive landscape. The auditor confirms this matches their understanding of the company from other audit procedures.

☐ 5. Capital structure / cap table

All share classes, options, warrants, SAFEs, convertible notes — with liquidation preferences, participation rights, conversion ratios, and anti-dilution provisions. This must reconcile to the company's legal documents.

☐ 6. Financial statements used

Specify which financial statements were relied upon (date, audited vs. unaudited, management-prepared). The auditor cross-references to their own audit workpapers.

☐ 7. Data source provenance index

Every material input (market data, comparable companies, industry multiples, risk-free rate) should be traceable to its source. "S&P Capital IQ," "S&P Capital IQ," "Management representation" — not just "industry data."

☐ 8. Methodology selection rationale

Written explanation of why the selected approach(es) — income, market, cost, or combination — are appropriate for this company at this stage. Document alternatives considered and reasons for rejection.

☐ 9. Comparable company selection & criteria

If GPC or GTM method is used: list of comparables, selection criteria, why each was included, and why obvious alternatives were excluded. Include SIC/NAICS codes, size range, and growth profiles.

☐ 10. Discount rate build-up

If DCF is used: full WACC or build-up calculation showing risk-free rate, equity risk premium, size premium, company-specific risk premium, and source for each component.

☐ 11. Equity allocation documentation

OPM, Backsolve, or PWERM — with full documentation of breakpoints (from waterfall analysis), volatility input, time-to-liquidity assumption, and resulting per-share values.

☐ 12. DLOM calculation & support

Method used (Finnerty, Chaffe, restricted stock studies, protective put), inputs, and result. The auditor benchmarks your DLOM against published ranges and their own expectations. Typical range: 15-35% depending on stage and time to liquidity.

☐ 13. Sensitivity analysis

Impact of ±10-20% changes in key assumptions (discount rate, revenue growth, exit multiple, volatility, DLOM) on the concluded value. This is the #1 most commonly requested supplemental item.

☐ 14. Professional judgment documentation register

Documented rationale for every material judgment decision — methodology selection, weighting, DLOM selection, scenario probabilities (if PWERM). Each entry should include: the decision, the alternatives considered, the rationale, and supporting evidence.

☐ 15. Auditor Q&A pack

Pre-answers to the 10 most common auditor questions with direct cross-references to binder sections. If your provider doesn't include this, you'll be the intermediary between auditor and valuator for 2-4 weeks.

How FairValueX Scores on This Checklist

Every FairValueX binder covers all 15 items across 20 dedicated sections. The checklist items above map directly to our binder structure:

• Items 1-3 → Binder Sections 1-3 (Engagement, Qualifications, Independence)
• Items 4-7 → Binder Sections 4-5, 7 (Company, Cap Table, Data Provenance)
• Items 8-11 → Binder Sections 6, 8-10 (Methodology, Analysis, Equity Allocation)
• Items 12-13 → Binder Sections 12-13 (DLOM, Sensitivity Analysis)
• Items 14-15 → Binder Sections 11, 19 (professional judgment documentation, Audit Q&A Pack)