What is a 409A valuation and why does it matter?

409A valuation is an independent appraisal of a private company’s common stock value, required by IRS for tax compliance. It determines the strike price for stock options.

Why it matters: (1) Sets your option strike price (lower = better for you), (2) Determines spread for ISO/AMT tax calculation, (3) Usually 30-50% of preferred share price from last funding round, (4) Updated every 12 months or after major events.

How do I calculate my potential gains from stock options?

Basic formula: (Exit Price per Share – Strike Price) × Number of Shares = Gross Gain

Example: 10,000 options at $2 strike, company acquired at $20/share = ($20 – $2) × 10,000 = $180,000 gross gain.

Then subtract: Exercise cost ($2 × 10,000 = $20K), Taxes (ordinary income or cap gains depending on ISO holding period).

What is dilution and how does it affect my equity value?

Dilution occurs when a company issues new shares (funding rounds, employee grants), reducing your ownership percentage. However, company value typically increases more than dilution decreases your %.

Example: You own 0.5% at $50M valuation = $250K. After Series B, you own 0.35% at $150M = $525K. Your % dropped but value doubled.

Protection: Negotiate refresh grants to maintain ownership %, ask about anti-dilution provisions (rare for employees).

When should I exercise my stock options?

Early exercise (if available): Right after grant, pay minimal taxes (file 83(b) election within 30 days), start capital gains clock.

At exit: If you can’t afford exercise cost or don’t want risk, exercise when company IPOs/is acquired. Most common approach.

Before leaving: ISOs usually have 90-day exercise window after leaving company. NSOs may have longer period.

Tax optimization: For ISOs, hold 2 years from grant + 1 year from exercise for long-term capital gains treatment.

What are the tax implications of different equity types?

ISO (Incentive Stock Options): No tax at grant or exercise (but AMT may apply). If held 2+1 years, taxed at long-term cap gains rate (23.8% max). Best tax treatment.

NSO (Non-Qualified): Taxed as ordinary income on spread at exercise (up to 37%). Subsequent gains are cap gains.

RSUs: Taxed as ordinary income when vested based on FMV. No special holding period. Employer withholds taxes.

ESPP: Discount taxed as ordinary income; gains can be cap gains if holding period met.