- 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 can expose the recipient to 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.
409A Valuation integrated into your stock options workflow
Cake keeps the 409A step connected to the rest of your equity setup. With Cake, you can:
- Initiate a 409A directly from your Cake account, no separate provider to contact
- Skip the manual export, since your cap table data is already there
- Get a draft valuation in 3 business days, included with your subscription
- Keep the result connected to your option grants in the same platform
This article is designed and intended to provide general information in summary form on general topics. The material may not apply to all jurisdictions. The contents do not constitute legal, financial or tax advice. The contents is not intended to be a substitute for such advice and should not be relied upon as such. If you would like to chat with a lawyer, please get in touch and we can introduce you to one of our very friendly legal partners.
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