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Section 409A (tax code)

Also called: IRC 409A, 409A rules

In one line

The US tax code section governing deferred compensation, which is why private companies need defensible 409A valuations for options.

In plain English

Section 409A sets harsh penalties if deferred pay (including under-priced options) isn't valued and structured correctly. It's the reason the annual 409A valuation exists.

If you were explaining it to a 5-year-old

A strict tax rule that makes the club get a fair referee price for its toy vouchers, or face big penalties.

Why it matters when you sell

409A compliance is why your strike price was set where it was, and it underpins the valuations you'll reference when selling.

Related terms

409A valuationStrike priceDeferred compensationFair market value (FMV)

Put it to use

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Sources

Primary references for this term: IRS (US tax). Our definitions are written in plain English and kept evergreen — see the glossary methodology. General information, not advice.

Educational information only — not financial, tax or legal advice, and not an offer to buy or sell any security. Definitions are general; your own documents and local law govern your situation. PrivateTechShares is independent and not a broker or marketplace.