409A Valuation vs Fair Market Value (FMV): Key Differences

FMV is the question, and a 409A valuation is one answer to it, for one class of shares on one date. The table compares them on what each is, who uses it, how it is set, how long it lasts, liquidity, tax treatment and what goes wrong.

For the appraisal itself, with its steps and a worked example, see our guide to the 409A valuation. The wider rule it serves is explained in Section 409A.

For a listed company, FMV is easy to find. The 409A rules give the company a choice of methods. It can use the last sale before or after the grant, or the closing price. It can also use the average of the day’s high and low, or an average over a window of up to 30 days. Each option grant uses one of these methods.

A private company has no trading price. Here the IRS has long relied on Revenue Ruling 59-60, a 1959 ruling on valuing shares of closely held companies, meaning those owned by a few people. It says no formula fits every case and that FMV is a question of fact. It lists eight factors, including the company’s history, its earnings, its book value, past sales of its stock and the prices of similar listed companies. Our page on the discount for lack of marketability covers one adjustment these appraisals often make.

The 409A regulation turns this into a test for option grants. A value is reasonable if it weighs the company’s assets, cash flows, comparable companies and recent arm’s-length sales of its stock, meaning sales between unrelated parties. A value older than 12 months, or one set before news that changes the picture, is not reasonable. Three methods earn a presumption, called a safe harbor, that the IRS can overturn only by showing the result was grossly unreasonable.

Most of the tax on equity pay is measured with FMV. The 409A price matters once, at the grant, and FMV matters at every later step. The list shows where each comes in.

• Option grantThe strike price must be at least FMV on the grant date. For a private company, the 409A valuation supplies that FMV. An incentive stock option has the same floor under IRC §422.
• Option priced below FMVThe option is deferred pay that fails 409A. The holder is taxed on the spread as it vests and owes an extra 20% plus interest. See 409A penalties.
• Exercise of a non-qualified optionYou report income equal to FMV on the exercise date minus the strike, under IRC §83.
• Restricted stock and RSUsYou report income equal to FMV when the shares vest, minus anything you paid.
• Gifts and estatesShares are valued at FMV on the date of the gift or death. A forced-sale price does not count.

One rule ties the two together. The regulation lets a company use a different method for each separate purpose. But once a strike price is set, a later method cannot change it after the fact. ISO vs NSO explains how the two option types are taxed, and RSU taxes covers vesting. Some option exercises also trigger the alternative minimum tax, a parallel US tax calculation.

A private company gets a 409A appraisal that values its common stock at $8.00 a share. The board grants an employee 10,000 non-qualified options at an $8.00 strike. Later, the company runs a tender offer, a buyback from existing holders, at $20.00 a share.

The income at exercise is the spread: 10,000 × ($20.00 − $8.00) = $120,000. The 409A price did its job once, at the grant. Every later number is FMV on that day. Read more about the buyback in our guide to the tender offer.

Neither is better. They answer different questions. A 409A tells the board the lowest price it can safely grant options at. FMV tells the IRS what any property was worth on a given date.

409A Valuation

For

A clear, defensible number for option grants. A safe harbor shifts the burden to the IRS. A strike set at a low 409A price gives employees more room to gain.

Against

It values common stock on one date only. It goes stale within 12 months or after a material event. It says little about what the whole company is worth.

Verdict: a 409A suits its one job, pricing options in a private company. Employees should read it as the floor for their strike. Investors should read it as a tax figure, and the price paid in a funding round is a separate number.

Fair Market Value

For

One standard across the tax code. For listed stock, the trading price gives a clear answer every day.

Against

For private stock, there is no single number. Each date needs its own evidence, and the IRS can dispute it.

Verdict: FMV is the measure your tax bill rests on whenever you receive, sell or give away shares. In a private company, the latest 409A and recent arm’s-length sales are the main evidence of it, and they can point to different numbers.

If you are an employee, check that your strike price equals the 409A value on your grant date. Keep the grant letter, which shows both. When you exercise or shares vest, ask the company which FMV it reports. That number sets your income. Our guide to private company valuation explains why the round price, the 409A and secondary prices differ.

Common Mistakes

• Treating the 409A as the company’s valueIt prices one share of common stock for tax. Investors paid a different price for preferred stock.
• Using an old 409A for a new dateA value older than 12 months, or one set before a priced round or a tender offer, is not reasonable.
• Assuming FMV at exercise equals the strikeFMV is measured again on the exercise date. The gap is taxable income for a non-qualified option.
• Ignoring a tender offer priceA recent arm’s-length sale is evidence of FMV that the next 409A has to consider.
• Reading FMV as a forced-sale priceFMV assumes neither side is under pressure to act. A distressed sale does not set it.

Fair market value

The price a willing buyer and willing seller would agree on, both knowing the facts and neither forced to act.

409A valuation

An appraisal of one common share of a private company, used to set the minimum option strike.

Strike price

The price an option holder pays per share on exercise.

Safe harbor

A valuation method the IRS presumes reasonable. It can overturn the result only if it is grossly unreasonable.

Arm’s-length sale

A sale between unrelated parties, each acting in its own interest.

Spread

The gap between a share’s FMV and the option’s strike price.

Revenue Ruling 59-60

A 1959 IRS ruling that sets out how to value shares of a company with no market price.

Deferred compensation

Pay earned in one year and paid later. Section 409A sets its rules.

Every rule was last checked on October 29, 2026, against the statute, the Treasury regulation and the text of Revenue Ruling 59-60. All rules are US federal tax rules. The worked example is invented.