A 409A only protects your team if it is current and used correctly, and the IFRS 2 option value in your accounts is only as good as the share value behind it. These are the mistakes we see most often, and each one can cost your option holders the safe harbour.
1. Granting options before the valuation is done
Options priced from a valuation dated after the grant have no safe harbour for that grant. Board approval of grants should come on or after the valuation date, with the strike price taken from the report.
2. Ignoring a material event
A 409A is presumed reasonable for up to 12 months, but only if nothing material has changed. Events that usually call for a new valuation:
- a signed term sheet or a closed priced round
- a secondary sale of shares, especially at a high price
- a large change in results or forecast, up or down
- acquisition or IPO discussions moving forward
- a major contract won or lost
Granting options after a term sheet is signed, using the old valuation, is one of the most common and most expensive errors.
3. Letting the valuation go stale
Twelve months is the outer limit, not a target. Many startups refresh after every priced round and at least once a year, so a valuation is always ready when the next hire arrives.
4. Forgetting the secondaries
When founders or early employees sell shares to investors, the price paid is evidence of value. A valuer has to consider it, even if the buyer paid a premium for strategic reasons. Tell your valuer about every secondary, including ones that were only negotiated.
5. Using different numbers for tax and accounts
The same options are valued for 409A, for the IFRS 2 or ASC 718 expense in your accounts, and increasingly for UAE corporate tax. If the numbers do not reconcile, auditors and acquirers will ask why. In an IPO, a gap between recent 409A values and the listing price draws regulator questions about "cheap stock". One consistent valuation file avoids all of that.
A simple 409A calendar
- After every priced round: new valuation before the next grant.
- Every 12 months at the latest.
- Before any grant made after a material event.
- Keep each report with the board minutes approving the grants.
How iConsult can help
We keep startups on a 409A cycle that fits their hiring plan. See how a 409A valuation is done, our valuation services or book a free consultation.
This article is general information, not legal or tax advice. It reflects the rules as we understand them on the date shown; laws and guidance change, so check the current position or talk to us before you act.