409A Triggering Events: When You Need a New Valuation
FairValueX Team · 8 min read
The 12-Month Rule and Material Events
Under Treasury Regulation §1.409A-1(b)(5)(iv), a valuation must be performed no more than 12 months before the grant date to qualify for safe harbor. But the regulation also states that a valuation is no longer valid if the company "knows or should know" that a material event has occurred since the valuation date that would make the valuation no longer reasonable.
The challenge: the regulations don't define "material event" with specificity. The IRS has left this intentionally broad, which means the burden is on the company to exercise judgment about when a new valuation is needed.
Definite Triggering Events
These events always require a new valuation before any subsequent option grants:
🔴 Equity financing round (priced round)
A new funding round at a different price per share than the existing valuation reflects is the clearest triggering event. The arm's-length price paid by investors is strong evidence of the company's current value, and ignoring it is indefensible.
🔴 Change of control or acquisition
If an acquisition is pending or probable, the common stock value has fundamentally changed. Granting options at the old price creates obvious underpricing.
🔴 IPO filing or confidential S-1 submission
Once the company files, the "start-up illiquid stock" safe harbor is no longer available (expectation of IPO within 180 days). The company needs a valuation reflecting the IPO trajectory.
🔴 Annual valuation expiry (12-month deadline)
Even without any material event, the existing valuation expires 12 months after its effective date. Mark your calendar.
Probable Triggering Events
These events likely — but not always — require a new valuation. Context matters:
🟡 Convertible note or SAFE conversion
If a SAFE or convertible note converts into equity at a significantly different price than the 409A reflects, the cap table has materially changed and a new valuation is needed.
🟡 Significant revenue milestone or contract win
Signing a contract that materially changes the company's financial trajectory (e.g., doubling ARR, landing an enterprise customer that validates the market) can be a triggering event.
🟡 Major product launch or pivot
Launching a new product that opens a significantly larger market, or pivoting away from the business described in the existing valuation.
🟡 Key executive hire or departure
Hiring a CEO, CTO, or other C-suite executive can change the company profile. Losing a founder or key person may also trigger a revaluation, especially at early stages.
🟡 Secondary share transaction
If shares change hands in a secondary market at a price significantly different from the 409A value, this is evidence that the FMV has changed.
Events That Usually Don't Trigger a New Valuation
✅ Normal hiring and option grants
Granting options to new employees using the existing valid 409A is exactly what the valuation is for. No new valuation needed per grant.
✅ Minor headcount changes
Adding or losing a few non-executive employees doesn't materially change the value.
✅ Incremental revenue growth
Growth that's consistent with the projections used in the existing valuation is expected, not a triggering event.
✅ Market fluctuations
General market volatility doesn't typically require a new valuation unless it specifically and materially impacts comparable company values.
The Decision Framework
Do I need a new valuation? Ask three questions:
1. Has the event changed the company's equity value by more than 10-15%?
If yes, it's likely a triggering event. If the value change is within normal variance, it may not be.
2. Would a reasonable third party view this as changing the FMV?
Think about how your auditor, the IRS, or an employee exercising options would view it.
3. Was this event anticipated in the existing valuation's projections?
If the projections already incorporated this event (e.g., planned product launch), the valuation may already reflect it.
Best Practice: The Valuation Calendar
- Set a reminder 10 months after each valuation date
- Brief your valuation provider before board meetings where financing or M&A will be discussed
- Add "409A implications" as a standing agenda item for board meetings
- Consider quarterly retainers for companies doing active option grants
FairValueX's quarterly retainer provides 4 valuations — one per quarter — ensuring continuous safe harbor coverage regardless of triggering events.
Related Resources
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