Yes. A 409A is required before issuing stock options to employees. Without a current 409A, you cannot set a compliant strike price. Options issued without a valid 409A may expose the recipient to adverse tax treatment under IRS Section 409A, including immediate income recognition, a 20% penalty tax, and interest charges.
The IRS requires that employee stock options be issued at or above the fair market value of your common stock on the grant date. The 409A is how you establish that fair market value. Without it, you have no defensible basis for your strike price.
The compliance risk falls primarily on the employee, not the company. If options are issued below fair market value — even inadvertently because the 409A was expired or missing — the recipient faces income tax on the spread at vesting, a 20% penalty on top of that, and interest. This is the kind of consequence that creates serious problems during due diligence, when employees go to exercise, or when a company is acquired.
The most common scenario where this goes wrong: a company hires a key employee quickly and issues options before renewing an expired 409A. The fix is always to get the 409A in place first and use the grant date that falls after the new valuation is complete.
There is no grace period and no retroactive fix. If you issued grants on an expired valuation, the compliance exposure exists. The practical approach is to treat a current 409A as a prerequisite to any option grant, not a follow-up task.
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