Equity Management

How to Perform a 409A Valuation Using Carta

You’ve established a business and formed a legally backed entity that lays the groundwork for equity issuance. Now, you are confident that your next step is to develop a stock option plan, outlining how equity will be distributed among employees, executives, and stakeholders. 

But you need to conduct a 409A valuation first. So, you’ve chosen Carta, the best choice for startups in the United States looking to conduct 409A valuations. 

Either it’s your first time conducting one or using Carta, this article will show you all you need to prepare for a 409a valuation on Carta and walk you through the process of conducting one on the platform. 

What to expect from the Carta 409A valuation process

  • When preparing for a 409A valuation, Carta ensures your cap table is current and validated, saving time by providing essential details needed for the valuation. Carta also includes additional information, like financial statements and projections, through  XeroTM and QuickbooksTM integrations.

  • Following this, an analyst reviews your data and uploaded documents. They may reach out to confirm details or schedule a discussion to capture qualitative risks, industry-specific information, and assumptions in the projections.

  • After gathering the necessary information, the analyst conducts a preliminary analysis using Carta’s proprietary software to assign values to share classes. The software includes checks for accuracy and undergoes internal review against Carta’s valuation policy.

  • Using Carta for both cap table management and 409A valuations saves time and enhances audit defensibility. Though Carta’s valuation team is independent, analysts can utilize cap table data and valuation software to automate calculations, allowing for more focused attention on the company's specifics during the valuation analysis. 

Common 409A valuation methodologies that Carta uses. 

The essence of having a third-party appraiser conduct your 409A valuation is fairness. For Carta, there are three standard methodologies used during a 409A: market approach, income approach, and asset approach.

1. Market Approach (OPM Backsolve): In financing rounds, valuation providers often utilize the Option Pricing Model (OPM) backsolve technique. This method assumes that new investors pay fair market value for equity, typically in preferred stock. Adjustments are made to determine the fair market value (FMV) for common stock.

Alternatively, other market-based approaches use financial metrics such as revenue, net income, and EBITDA (earnings before interest, taxes, depreciation, and amortization) from comparable public companies to estimate the company’s equity value.

2. Income Approach: For businesses with strong revenue and positive cash flow, valuation providers commonly employ the direct income approach. This method determines a company's value by evaluating its projected future cash flows and considering associated risks.

3. Asset Approach: This methodology evaluates a company's valuation by assessing its net asset value. It is often applied to early-stage companies that lack fundraising and revenue streams.

Preparing for a 409a Valuation in Carta

Gathering Necessary Documentation

In June 2023, Carta introduced the new dynamic 409A request form that allows early-stage companies to proceed with their request without the need to provide unnecessary information. 

Carta’s requirements for a 409A Valuation, however, include;

Company details
  1. Name of your CEO
  2. Name of your external audit firm (if applicable)
  3. Name of your legal counsel
  4. Your amended and restated articles of incorporation

Industry information
  1. Your industry.
  2. A list of relevant and comparable public companies (Most 409A valuations rely on some form of comparison to publicly traded companies)

Fundraising and options
  1. The most probable timing of a liquidity event
  2. Your company presentation, business plan, or executive summary

Company financials
  1. Historical financial statements
  2. Forecasted revenue for the next 12 months, from the valuation date to the next two calendar years
  3. Forecasted EBITDA for the next 12 months, from the valuation date to the next two calendar years
  4. Cash burn and runway
  5. Non-convertible debt amount

Additional details
  • Any materially relevant events since your last 409A valuation (if this is your first-ever 409A, share a complete history of relevant events)

Conducting a 409a Valuation in Carta

Just before you complete your valuation request, Carta has a downloadable checklist you should use when running the process. 

Step One: Getting Started

  1. Login to your account, and navigate to "Compliance & Tax > 409A Valuations" on your dashboard. 
  2. Click “Get Started”
  3. Review what to expect from the valuation process. 
  4. To proceed, click “Start 409A request”
  5. Review and click “I agree to the Terms and Conditions” to proceed

Step Two: Providing essential information

  1. Provide some basic information as requested (listed above) 
  2. In the "Introduction" section, verify the company’s Incorporation date and Industry, and click “Next”
  3. Enter a Business description of a minimum of 1,000 characters in the text box. Click “Next”
  4. Enter the requested Valuation date, in the "Valuation" section. (It's safe to select a valuation date based on your legal counsel's recommendations) Click “Next”.
  5. Complete the Fundraising section based on the requested valuation date entered on the previous page.
  6. Indicate if there have been any recent common stock transactions within the indicated period for the company. If “Yes” is chosen, proceed to provide further details regarding the common stock transaction. Click “Next” to continue.

Step Three: Essential financials:

The data you input here automatically appears in the 409A request workflow section. 

  1. Choose the appropriate Last 12 months revenue option for the displayed date range from the dropdown menu. Click Next.
  2. Verify the Invested capital amount as of the valuation date. Click Next.
  3. Specify whether the company holds any Crypto holdings. If Yes, furnish details of the assets in the text box. Click Next.
  4. Select the date for providing the company’s cash and debt balance, then input the Cash balance and Non-convertible debt amount in the respective fields. Click Next.
  5. If Prepared financial forecasts for the next 12 months are available, select the Projected revenue from the dropdown menu. Click Next.
  6. In the Cap Table section, delete any unissued drafts to proceed with the 409A request. (To address any unissued draft securities, click the corresponding Go to button. Then, click the Draft button from the security type’s ledger page. Resolve any unissued drafts. Once completed, return to the 409A request workflow and click Refresh.) Click Next.
  7. Review any outstanding convertible notes and ensure the accuracy of the information. To rectify any errors, click Go to convertibles. To proceed, click I confirm the info is correct.
  8. The economic rights and preferences determine the fair market value of common stock. Confirm the accuracy of the terms concerning the company’s most recent incorporation document. To proceed, click I confirm the info is correct.
  9. Indicate whether Carta’s valuations team should amend the rights and preferences to align with your latest articles of incorporation if necessary. Click Next.
  10. All Essential information has been provided. Click Continue to 409A form to proceed.

Step Four: The 409A request form:

The details entered on the preceding pages will automatically fill in Carta’s 409A request form. After generating the form, users will be guided to fill out the remaining fields to finalize and submit the valuation request.

  1. Request details: Confirm the status of the company’s most recent 409A valuation, select the preferred Valuation date, and acknowledge that no securities have been issued since that date by checking the box. (If an external valuation not reflected on Carta exists, select Yes and provide additional details about the 409A.) Click Next to proceed.

  1. Company overview: Ensure that all fields marked with an asterisk are updated. (Choose the company’s CEO from the dropdown menu, and designate a Point of Contact for 409A who will provide information about the company during the 409A kickoff call. Specify the company’s Audit status, select the company’s Law firm from the dropdown menu, choose or upload the Incorporation document, and optionally, attach a copy of the Board/pitch deck.) Click Next.

  1. Description and updates: Furnish a Business description, indicate company performance, detail any Company updates since the last 409A (or within the last 12 months), and provide three keywords or phrases that best describe the company’s product/services. Click Next.

  1. The financial section: Review the required information and click “Begin” to initiate the process.

  1. Indicate if the company has any subsidiaries. Click Next.

  1. Select your preferred method for providing balance sheet and income statement information. Click to connect accounting software if applicable. The quickest way to add your company's current financials is by connecting a QuickBooks account. If not, "Enter manually" will appear as the default selection. Click Next.
  2. Specify the date for the company’s most readily available cash and debt balance, and input the current Cash balance and Non-convertible debt. Click Next.

  1. From the dropdown menu, choose the length of time until the company exhausts its cash (assuming no further fundraising and no profitability). Click Next.

  1. Enter the company’s revenue and EBITDA for the twelve months preceding the Valuation date. Click Next.

  1. Enter the company’s revenue and EBITDA for the twelve months prior to the Valuation date. Click Next.

  1. Indicate whether you have knowledge of the company’s projected revenue and EBITDA for the twelve months following the Valuation date. Click Next after completing each section.

If Yes, input the projected revenue and EBITDA for the provided date range. If exact forecasts are unavailable, a high-level estimate suffices. Select the percentage of the forecast under contract or in the pipeline from the dropdown menu and upload a forecast model and additional projected financials.

If No, contact Carta’s Valuations support team using the provided contact information, as a financial forecast is necessary to proceed with the valuation request.

  1. Indicate whether you know the company’s projected revenue and EBITDA for the specified calendar year. If exact forecasts are unavailable, a high-level estimate suffices. The financial forecasts should represent the most realistic scenario, also known as the "base case."

If Yes, input the projected revenue and EBITDA for the specified calendar year. If exact forecasts are unavailable, a high-level estimate suffices. Click Next.

If No, simply click Next.

  1. Apply the instructions from the previous step to indicate whether you know the company’s projected revenue and EBITDA for the subsequent calendar year. Click Next when finished.

  1. Review and Submit: Scroll down to verify the accuracy of answers in the Financials section. Click Next when finished. (To edit a prior response, click the applicable field’s lock icon and enter a new response)

  1. Resolve drafts (if applicable): All security drafts must be either issued or deleted before advancing with the valuation request..

(You will only be directed to this section of the form if securities with an Issue date on or after the requested Valuation date have been drafted after completing the Essential financials section.)

Once all drafts are resolved, click Next

  1.  Convertible notes (if applicable): Examine any outstanding convertible notes and verify the information's accuracy. (You will only be directed to this section of the form if any outstanding convertible notes have been added to Carta after completing the Essential financials section.)

Click Next.

  1. Rights and preferences: The economic rights and preferences determine the fair market value of common stock. Validate the accuracy of these terms against the company’s latest incorporation document. Specify whether you would like Carta’s valuations team to adjust the rights and preferences to align with your most recent articles of incorporation if necessary. ( You may not reach this section, as Rights and preferences are covered in the Essential financials workflow above.) 

Click Next. 

8. Comparable companies: Choose a minimum of three public and three private companies that are akin businesses operating within the same industry, share a similar business model, or would be directly affected by your operations' impact. 

If the company is in Carta’s database, choose it from the dropdown. If not, select Add new company to the list. Once completed, click Next.

9. Financing rounds: Verify the accuracy of financing round data in Carta. 

  1. Confirm raised preferred round(s): Validate if historically raised preferred round(s) information on Carta is up-to-date. If Yes, respond to the questions that appear below the selection. If No, click View and update the capitalization table to rectify the entry and update the company's cap table. Then, click “Refresh capitalization table” and select Yes to proceed.

  1. Confirm common stock transactions: Indicate whether the company has conducted any common stock purchases or sales in the six months preceding the Valuation date at a price exceeding the previously determined FMV. If Yes, provide a rationale for the transaction(s) and answer the subsequent questions. Choose the option that best characterizes the company’s financing as of the Valuation date. 

  1. Click Next when completed.

10. Pivots: Specify if the company has undergone a significant alteration in business operations since the last financing, where previous product development efforts will not transfer to the new business venture. If Yes, provide further details in the text box. Click Next.

11. Other indication of value: Specify if the company is contemplating a letter of intent for acquisition from a potential buyer. If Yes, provide additional details in the text box below. Click Next.

12. Valuation details: Use this section to include any additional information that could affect your 409A valuation:

  1. Outline any projected future financing rounds and plans for potential exits, such as an IPO within the next 18 months. 
  2. Provide details on any cryptocurrency assets, including anticipated fair market values, and any other relevant information. Once complete, click Next.

  • Step Five: Review and submit: If necessary, revise any entered information by clicking into the relevant section on the left. Check the box to confirm the accuracy and currency of the provided information. Then, click Submit your request.

  • Step 6: You'll receive an email outlining the next steps in the valuation process. Additionally, you can track the status of your request at any time by visiting Compliance or Compliance & Tax > 409A Valuations.

When should you conduct a 409A valuation for your business? 

409A valuations remain valid for a maximum of 12 months. Therefore, if no significant events occur within one year of the previous valuation, it's advisable to request a new 409A valuation annually.

However, there are other events during which you might need to conduct one:

  • Equity Compensation: If your company plans to issue stock options, restricted stock units (RSUs), or other forms of equity-based compensation to employees, consultants, or advisors, a 409A valuation is necessary to determine the fair market value of the company's common stock. This valuation ensures compliance with IRS regulations regarding the pricing of equity awards.

  • Mergers and Acquisitions: A 409A valuation may be required during merger or acquisition negotiations to assess the value of the company's common stock. This valuation helps in determining the exchange ratio for stock-based transactions and ensuring that the transaction is structured fairly for all parties involved.

  • Employee Stock Purchase Plans (ESPPs): If your company offers an ESPP allowing employees to purchase company stock at a discounted price, a 409A valuation is necessary to establish the offering price for the stock. This helps ensure compliance with IRS rules governing ESPPs.

  • Private Placements and Fundraising: Investors in private placements or fundraising rounds often require a 409A valuation to assess the fair market value of the company's common stock before investing. This valuation provides investors with confidence in the valuation of their investment and helps prevent potential legal or tax issues.

  • Financial Reporting: In some cases, companies may use 409A valuations for financial reporting purposes, particularly for startups and privately held companies. These valuations may be used to estimate the value of equity-based compensation expenses on financial statements or to provide insight into the company's overall valuation for internal decision-making.

  • Obtaining a 409A valuation typically precedes equity management. A 409A valuation provides an accurate assessment of the fair market value of your company's common stock, which is crucial for equity management decisions such as granting stock options or issuing equity to employees. Therefore, it's common practice for companies to undergo a 409A valuation before implementing or adjusting their equity management strategies.

Why is it necessary for you to a 409A valuation for your company? 

  • 409A valuation is a business practice backed by law, which means you would be flouting legal precepts if you don't conduct one  for your business. 

Failure to follow IRS rules can lead to hefty penalties, like an extra 20% tax on the employee's earnings, along with interest and fines. You can avoid these penalties by getting a 409A valuation to stay compliant with IRS regulations.

  • It's a potent hiring and employee retention strategy. To attract and keep skilled employees, startups often give out compensation in the form of stock options. The worth of these options depends on how much the company's common stock is worth, which can greatly affect both the employee's pay and the company's ability to keep talented people on board.

  • 409a Valuations are also necessary for fundraising. Investors rely on 409A valuations to assess a company's worth and the price they'll pay for each share. A higher valuation may lead to bigger investments and less reduction in ownership for current shareholders.


  1. How much do 409a Valuations cost?

For standalone valuations, the cost ranges anywhere from $1,000 to over $10,000, depending on the size and complexity of your company. At Carta, 409A valuations are included in an annual subscription along with cap table management.

  1. How long are 409A valuations valid?

IRC 409A valuations are valid for a maximum of 12 months after the effective date—or until a material event occurs.

  1. What is a 409A refresh?

After 12 months (or sooner, if there’s a material event), your company will need a 409A refresh—in other words, an updated valuation. Any event that may change the valuation of the company means you need a new 409A

  1. What is a 409A material event?

Outside of financing, other events may be considered material, such as

  • A significant, new, or lost contract that represents a material change in revenue, including annual recurring revenue (ARR). 
  • Any material, closed acquisition with your company as the buyer or seller. 
  • Your company received a term sheet from a potential acquirer.
  •  Strategic partnership that is likely to open new markets or improve margins.
  •  Regulatory changes that significantly increase or decrease your addressable market.

Bonus Tips. 

  1. When resolving drafts (if applicable), if there are any unresolved drafts, click the” Go to” button to the right of the draft security type’s row. In the new tab, follow these steps to issue the draft. Alternatively, select the draft’s row number and press delete on your keyboard to clear the draft’s details. After resolving all drafts, click Refresh Drafts.
  2. Before you review and submit, if your company is pre-revenue (or minimal revenue) and has not raised a priced-equity round of financing, valuation guidance recommends the Cost-to-Recreate valuation methodology. There’s a worksheet provided that you can complete before moving on to the next steps


In essence, getting a 409A valuation is a crucial milestone in the growth of your startup and the achievement of your business objectives. With Carta, you can rest assured of accuracy by maintaining an up-to-date cap table, integrating financial data seamlessly, and automating calculations. Additionally, Carta saves time by streamlining processes, allowing analysts to focus more on understanding the client's company rather than manual tasks.  Overall, Carta's sophistication optimizes efficiency, accuracy, and compliance throughout the 409A valuation process. 

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