The 409A valuation you didn't update

What was the date of the 409A you priced September's option grants against? The auditor asked it in November, in the calm voice auditors save for expensive problems. At one company, the answer was eighteen months back. The most recent 409A had gone stale, and the company had granted options to a dozen new hires against it in the meantime. Under IRC Section 409A, that isn't a paperwork slip. It's compensation income, penalties attached, and the cleanup ran an order of magnitude past what a refresh would have cost.

At one company after another, a third-party 409A runs $5,000 to $10,000. Set against that, this is one of the most consistently mismanaged compliance items at growth-stage companies, and the reason is structural. A 409A has to be refreshed every twelve months, or the moment a material event resets the company's value, whichever lands first. The work is unglamorous. It falls between rounds, when finance attention is somewhere else, and the cost of skipping it stays invisible until an auditor or a new hire's tax preparer surfaces it.

The material-event trigger is the one that gets missed. A funding round resets the value. So can a major customer loss, an acquisition offer, or a strategic pivot. After any of them, options priced off the old number are priced off a stale valuation, whether or not twelve months have passed. Founders who grade the company by [sales rather than the round they raised](/blog/real-company-valuation-sales-over-funds-raised/) already feel where this bites. The ones who wait until the [next capital raise](/blog/best-time-raise-capital-strong-team-product-feedback/) to think about it are the ones who miss it.

The remediation bill lands on the company and the employees both. The company pays legal and accounting to reprice the options, file amended grants, and document the chain. The employees may have to amend personal returns and can face penalties under 409A, which run steep: twenty percent additional tax plus interest on the appreciation. A missed refresh turns into a compliance issue, which turns into the auditor's November question, which turns into somebody's bad tax year. It belongs on the same list as the [tax mistakes founders make early](/blog/entrepreneur-tax-mistakes/) and rarely see coming.

The discipline is small. Put the 409A refresh on the finance calendar with a hard date, set to ten months out, not twelve, so there's slack for scheduling and review. Run it through a standing vendor relationship, no new RFP. The board signs off, the result goes in the data room, and every later grant references it. Then add one rule on top: any material event triggers an extra refresh, calendar or not.

Calendar the refresh. Run it on schedule. The alternative isn't saving a few thousand dollars. It's the calm-voiced question in November, and a bill an order of magnitude larger, paid by the people who trusted the grant.