19 Examples of 409A Material Events (You Need to Know!)

What Is a 409A Material Event?

A 409A material event is any event that could lead to a significant change in the value of your company. The term “material” implies that the event is substantial enough to influence the company’s fair market value of its stock. Examples include a significant change in revenue, a new product launch, or a funding round.

If a material event occurs, you will need to get a new 409A valuation completed.

When Do You Need a 409A Valuation? It’s Not Just Material Events.

Three instances trigger the need for a 409A valuation:

  • First: when you want to issue stock options to your employees. This is what we call an inciting trigger. Without this initial trigger, the following two triggers won’t apply. 
  • Second: anytime you experience a material event (listed below)
  • Third: in the absence of a material event, you need a new 409A valuation every 12 months.

In this article, we’ll look at 19 material event examples that trigger the need for a new 409A valuation.

19 Examples of 409A Material Events – Update Your Valuation When These Happen

As a startup founder, it is important to be aware of the different types of material events and how to recognize them. This will help you keep your IRC 409A valuation current and avoid any potential problems with the IRS.

Let’s look at what the most common material events are so that you can spot them when they happen. 

⚠️ A word of warning: While this list is inclusive of common material events, it is not exhaustive. It’s always best to check if other events could be considered material events. If ever in doubt, get in touch with your 409A valuation provider.

Material Event Example 1: Funding Rounds (Equity or Debt Financing)

When a company raises capital through equity financing, such as seed, Series A, B, or C funding, the influx of capital and the valuation set by new investors can significantly affect the company’s value.

Example 2: Significant Revenue Growth or Loss

Material changes in a company’s revenue, either sharp increases due to new product launches, major contracts, or significant losses, can alter the company’s valuation.

Example 3: Major Corporate Transactions

Events such as mergers, acquisitions, or sale of significant company assets can substantially change the company’s financial landscape and hence its valuation.

Example 4: Public Offering

If a company is preparing for an IPO (Initial Public Offering), the anticipated public market valuation will necessitate a new 409A valuation.

Example 5: Significant Changes in Capital Structure

This includes events such as debt restructuring, issuance of new equity, or changes in shareholder rights, which can affect ownership percentages and valuation.

Example 6: Change in Business Model or Strategy

A pivot in the company’s business model, such as entering a new market or launching a fundamentally different product, can lead to a re-evaluation of the business’s future prospects and valuation.

Example 7: Regulatory Changes or Major Legal Events

Significant legal or regulatory changes that impact the industry or the company specifically, such as lawsuits or changes in government policies, can influence a company’s risk profile and valuation.

Example 8: Key Personnel Changes

The departure or addition of key executives or founders can impact a company’s strategic direction and operational effectiveness, thereby affecting its valuation.

Example 9: Material Contracts or Partnerships

Entering into or losing significant contracts or partnerships can have a major impact on the company’s revenue and growth projections.

Example 10: Change in Ownership or Control 

This includes events like a significant shareholder selling their stake, or changes in the control structure of the company, which can affect the company’s governance and strategic direction.

Example 11: Major New Customers or Loss of Customers

Gaining or losing major customers can have a significant impact on a company’s revenue and growth projections, thus affecting its valuation.

Example 12: Technological Breakthroughs or Obsolescence

The development of groundbreaking technology or the obsolescence of current technology due to market changes can materially affect a company’s competitive position and future earnings potential.

Example 13: Economic and Market Conditions

Significant changes in the broader economic environment or specific market dynamics can impact a company’s performance and prospects, necessitating a revaluation.

Example 14: Intellectual Property Development

Gaining or losing key patents, encountering intellectual property disputes, or significant changes in IP laws that affect the company’s operations can impact its valuation.

Example 15: Product Launches or Failures

The success or failure of major new products or services can have a substantial impact on a company’s future revenue streams and market position.

Example 16: Natural Disasters or Unforeseen Events

Events like natural disasters, pandemics, or other unforeseen circumstances that significantly disrupt operations or markets can affect a company’s valuation.

Example 17: Changes in Industry Regulations

New regulations or changes in regulatory compliance in the industry the company operates in can have significant financial implications.

Example 18: Debt Financing or Restructuring

Taking on significant new debt, restructuring existing debt, or changes in the terms of debt can impact a company’s financial health and valuation.

Example 19: Internal Reorganizations

Major internal changes, like restructuring of departments or shifts in business strategy, can influence operational efficiency and future performance.

FAQs – Common 409A Material Event Questions

Do I need a 409A valuation for a convertible note?

Yes, if the convertible note has features like a valuation cap or discount, which can affect the price at which the note converts into equity, a 409A valuation is often needed to determine the fair market value.

Non-compliance with 409A can result in severe penalties, including immediate taxation of deferred compensation for the employee, plus a 20% additional tax penalty and interest on the taxes owed.

The company faces the hassle of dealing with the IRS and will likely take a hit to their reputation and employability of top talent.

To avoid this, it’s best to hire a 409A valuation consultant who can guarantee a compliant 409A valuation.

Yes, a SAFE can trigger a 409A valuation, particularly if it includes a valuation cap or discount, as it implies a future equity price and affects the company’s valuation.

While technically possible, it’s not recommended to conduct a 409A valuation yourself due to its complexity and the need for an objective, market-based assessment; typically, it’s performed by an independent, qualified appraiser.

If you did take it on yourself, you would be at greater risk of IRS audits and penalization.

It’s far better to source an independent 409A valuation provider who has a well-defined 409A valuation process that has consistently guaranteed safe harbor to their clients.

How can Eton help in the event of a 409A Material Event?

Eton Venture Services was founded by veteran Silicon Valley lawyers and includes a team of CPAs and CFAs who were trained by the ‘Big Four’. 

Our customized solutions, tailored reporting, and flexible pricing options ensure that private companies receive the highest level of service and value. 

Hundreds of companies have trusted Eton to provide rigorous, audit-defensible, and optimized IRC 409A valuations to assist in attracting, retaining, and incentivizing top talent that remains in compliance with the law.

Our team will work with you to ensure that your company’s financial reporting is compliant and that your IRC 409A FMV report accurately reflects the fair market value of your common stock and any impact on it from a preferred stock financing. 

Join the industry leaders who have already experienced the advantages of Eton’s exceptional client service and valuation expertise. Contact us today.

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President & CEO

Chris co-founded Eton Venture Services in 2010 to provide mission-critical valuations to venture-based companies. He works closely with each client’s leadership team, board of directors, internal / external counsel, and independent auditor to develop detailed financial models and create accurate, audit-proof valuations.

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