The 409A refresh: your valuation expires in 12 months

A 409A valuation is not a trophy; it’s a shield with an expiry date. Under Treas. Reg. §1.409A-1(b)(5)(iv)(B), an independent appraisal gives you a presumption that your option strike price equals fair market value — and that presumption lasts 12 months from the valuation date, or until a material event makes it stale, whichever comes first. Grant options on day 366 and you’re pricing equity on a number the IRS no longer has to respect.

Why the shield matters

Section 409A exists to stop companies from handing out below-market options as disguised deferred compensation. The penalty structure is aimed at the option holder, not the company: options deemed granted below fair market value can trigger immediate income recognition, a 20% additional federal tax, and interest — on employees who did nothing wrong except accept your offer letter. The company’s cost is different but real: repricings, amended grants, a diligence finding that reads “equity plan may have §409A exposure,” and the trust damage of explaining to your first ten hires why their options needed surgery.

With a valid safe-harbor valuation, the burden flips — the IRS must prove the number was grossly unreasonable rather than you proving it was right. That burden flip is the entire game, and it’s what expires.

The two clocks

The calendar clock: 12 months from the valuation date. Not from the board meeting that adopted it, not from your last grant — from the date on the report.

The event clock: a material event ends the presumption early. The obvious one is a financing — a priced round plainly re-prices the company, and a meaningful SAFE raise usually does too. Less obvious ones: a transformative customer contract, a pivot, an acquisition approach. The test is whether a reasonable person would say the old number no longer reflects reality.

The practical rule most counsel give: refresh annually, and refresh after every raise — then grants never wait on a valuation.

The trap pattern

The common failure isn’t ignorance; it’s drift. The 409A gets done at the seed round, options get granted for a year, hiring continues, month 13 arrives with three offer letters out — and the grants either wait weeks for a new valuation or go out on the stale one. Both outcomes are self-inflicted: the refresh costs a few thousand dollars and two weeks when scheduled, and a diligence finding when not.

How the room tracks it

Standing’s deadline engine starts a 12-month clock the day a 409A valuation report lands in your room and surfaces the refresh before it lapses — so the next grant cycle never runs on an expired number. It emits the obligation only when a 409A exists: if you’ve never had one and you’re granting options, that’s a different (and louder) conversation your gap report will already be having with you.