What a 409A valuation is
US tax rules (Section 409A) treat stock options granted with an exercise price below fair market value as deferred compensation. For US taxpayers holding such options, the consequences are harsh: income inclusion as the options vest, plus a 20% additional tax and interest. So Delaware startups set the exercise price at no less than the fair market value of the common stock on the grant date — and support it with a 409A valuation.
- A valuation by a qualified independent appraiser using accepted methods is presumed reasonable (a “safe harbour”), which shifts the burden to the IRS to challenge it.
- It generally remains usable for 12 months, unless a material event happens first — a priced round, a major contract, an acquisition offer.
When you need one
- Before your first option grants.
- At least every 12 months while you keep granting.
- After any material event, such as closing a priced round (converting SAFEs usually counts).
The Indian valuation for employees in India
For employees resident in India, what matters is Indian tax on exercise: the difference between fair market value on the exercise date and the exercise price is a salary perquisite, with TDS by the Indian employer. For shares of an unlisted company — which a private Delaware C-Corp is — the income-tax rules require that fair market value to be determined by a SEBI-registered Category I merchant banker, on a valuation date no more than 180 days before the exercise date.
A 409A report doesn’t satisfy this requirement. More on the Indian side: US parent ESOPs for Indian employees.
Side-by-side
| 409A valuation (US) | Merchant-banker valuation (India) | |
|---|---|---|
| Purpose | Set a compliant exercise price at grant | Measure the taxable perquisite at exercise |
| Who performs it | Qualified independent appraiser (for safe harbour) | SEBI-registered Category I merchant banker |
| How long it lasts | Up to 12 months, absent a material event | Valuation date within 180 days before exercise |
| Who relies on it | The US company and US-taxpayer option holders | The Indian employer (for TDS) and India-resident employees |
Timing in practice
- Refresh the 409A annually and after each priced round, before approving new grants.
- Batch exercise windows for India-based staff (for example, quarterly), so one merchant-banker valuation can cover several exercises within 180 days.
- Tell Indian payroll before each exercise — the Indian subsidiary deducts TDS on the perquisite even though the shares come from the US parent.
- Report the issuance in Form OPI half-yearly through the Indian subsidiary’s AD bank.
Common pitfalls
- Granting options before any 409A report exists, or after a round without refreshing it.
- Using the 409A value for Indian perquisite tax.
- Exercises happening outside the 180-day window of the latest merchant-banker valuation.
- Employees forgetting to report the shares in Schedule FA of their Indian return.
Related: 83(b) elections for founder stock, and the valuation services Durgesh provides.
Frequently asked questions
What is a 409A valuation?
How long is a 409A valuation valid?
Can a 409A valuation be used for Indian ESOP tax?
Who deducts tax when an employee in India exercises US parent options?
Please note: this guide is general information based on the rules as they stood on the review date above. Regulations and RBI/CBDT procedures change often — please get advice on your specific facts before acting.