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A 409A valuation is an independent appraisal of the fair market value (FMV) of a private company's common stock. The 409A valuation is required by the IRS for private companies that issue stock options to their employees to ensure these options are not issued at a discount.
The 409A refers to the IRS Section 409A tax code established in 2005, which requires companies to grant their stock options at FMV to avoid potential tax penalties. The valuation process must be performed by a qualified third-party expert to maintain objectivity. The valuation must be refreshed at least once a year or upon the occurrence of any material event such as receiving new financing, significant revenue growth, or a substantial change in business outlook.
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