How do I know when to order a 409A refresh?

Under IRC Section 409A, a 409A valuation provides 12 months of safe harbor with which to issue option grants at the designated strike price.  At the end of the 12 month period, your company will need what Carta calls a "409A refresh" or an updated 409A valuation.  There are,  however, instances when a company will need a 409A refresh before the 12-month safe harbor window expires.  These instances include a new qualified financing round of equity or debt financing, or a material event that may change the valuation of the company.  


A material event is an event that could reasonably be expected to affect a company's stock price.  Whether or not an event is material is specific to each company and should be determined by management in conjunction with the company legal team.  For example, if a company with $100K in trailing twelve-month revenue signs a new contract for $100K, even though this is doubling revenue it may not be considered a material event because the company is at such an early stage.  However, if a company has $1M in trailing twelve-month revenue, and signs a new $3M contract payable over three years, even though this is also doubling revenue in the next year, it may be appropriate for an updated 409A valuation. Other events that may also materially affect the value of your company include acquisitions, divestitures, secondary sale of common stock, strategic pivots in business models, and largely missing or exceeding previous 409a financial projections.


For most early-stage startups, a qualified financing is the most commonly encountered material event. Specifically, a qualified or arm’s length financing typically includes a significant sale of common shares, preferred equity, or convertible debt to institutional investors at a negotiated price. A general rule of thumb might be to ask yourself whether an accredited investor would consider your business to be significantly more or less valuable as a result of the event.  For case-specific questions around what qualifies as a material event, please contact valuations@carta.com.