Executive Summary
Quick Answer
Can I be penalized personally for my employer’s bad 409A valuation?
Source: Section 409A inclusion rules
Quick Answer
Is this the same as a down round?
Source: Concept distinction
Quick Answer
What should I do if counsel flags my grants in diligence?
Source: Transaction practice
Section 409A governs nonqualified deferred compensation. While RSUs and ISOs are often outside the core 409A “deferral” problem, NSOs (and certain RSAs) priced below FMV can create 409A income and penalties because the discount behaves like a deferral of compensation.
Pair with: 409A valuation basics, down round guide.
How “Wrong FMV” Shows Up
| Symptom | Possible issue |
|---|---|
| Strike far below last round price | Documentation gap |
| Rapid repricing series | Consistency questions |
| IPO comment letters | Restatement risk |
Penalty Framework (High Level)
IRC 409A can impose:
- Income inclusion when deferred amounts vest,
- Additional tax (often cited as 20% on includible amounts),
- Premium interest on underpayments,
…subject to detailed regulations and correction programs.
Employee Protections (Practical, Not Legal)
- Ask for 409A report summary at grant (some companies share).
- Avoid “handshake” exercise prices without documentation.
- Escalate if your strike price seems inconsistent with board-approved financings.
Disclaimer
Educational only. 409A analysis is fact-specific; consult tax counsel for your grants.