409A valuation

Section 409A of the tax code penalizes stock options granted below fair market value. A valuation from an independent appraiser creates a safe harbor presumption that the price is reasonable, and it remains valid for twelve months unless a material event occurs. Closing a financing, a major clinical result, or a term sheet are material events that require a refresh before the next grant.

For financial reporting the same valuation is the starting point for the ASC 718 fair value of awards, though auditors will look for consistency between the 409A and the price implied by the most recent preferred round. A large gap between the two, or grants dated before the valuation that supports them, leads to cheap stock questions, which become material in an S-1 review.

Practically: refresh after every priced round, never grant on a stale valuation, and keep the board consent, the valuation report, and the grant list in one place.