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What qualifies my 409A valuation for safe-harbor?
What qualifies my 409A valuation for safe-harbor?
Yin Wu avatar
Written by Yin Wu
Updated over a week ago

IRC 409A indicates that if a valuation qualifies for safe-harbor, then you are largely protected in the case of an audit. If the IRS challenges the valuation, they must prove that your valuation was "grossly unreasonable," which is challenging to do. If a valuation does not qualify for safe-harbor and the IRS challenges the valuation, then the burden of proof is on you to prove that the analysis is sound and accurate to avoid penalties.

To qualify for safe-harbor, the valuation must meet the following conditions:

  • The valuation must be determined by an independent appraiser, or (for startups only) a "qualified individual(s)" at a time that the corporation did not otherwise anticipate a change in control event or public offering of the stock.

  • The valuation must have been performed within the last 12 months.

  • There must be a written valuation report.

"Qualified individuals" are not clearly defined by the IRS, but industry commentators define them as individuals with significant valuation expertise (5+ years of experience) that may include the following individuals:

  • Directors or board members

  • CFOs

  • Investors

  • Investment bankers or private equity professionals

  • Valuation professionals

Most industry commentators agree that working with a reputable valuation firm is the only way to guarantee safe-harbor because the definition of "qualified individuals" is so ambiguous.

Disclaimer: We are not lawyers, and this is not legal advice. Although we try to make sure our information is accurate and useful, please consult a lawyer if you want legal advice.

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