409A Material Event

What is a 409A Material Event?

A material event is an event when your company undergoes a change that would affect the share value of the business. Material events are pivotal situations or changes to the business that would dramatically shift the valuation (value) of the company, which is also why there is a need for a 409A valuation when this happens.

Examples of 409A Material Events

Material events are not limited to a strict list, but the most frequent triggers include:

• Structural Reorganization: An event that materially alters the corporate structure and/or tax structure of the company. For instance, the change of the company from a for-profit to a non-profit business.
• New funding rounds: After funding events using convertible debts, sale of preferred or common shares.
• Change in Ownership: Qualified funding event that many startups encounter where ownership is given in exchange for funding to the investor
• Mergers & Acquisitions: Entering into or closing a merger, acquisition, or both with another company
• Significant secondary share sales: Large secondary transactions that could set a new market price for company stock.
• Product Launches or Market Expansions: Launching a major product or entering a new market can alter the company’s growth trajectory.
• Balance Sheet Changes: Major asset sales or acquisitions, taking on substantial new debt, or restructuring liabilities.
• Regulatory or Legal Events: Regulatory changes impacting your addressable market, or involvement in major lawsuits.
• Strategic Partnerships: Agreements likely to open new markets, improve margins, or otherwise significantly impact operations.
• Significant Leadership Changes: Changes in executive leadership, especially if they affect investor confidence or company direction.
• Major Customer or Revenue Changes: Winning or losing a customer contract that represents a material portion of revenue, or any significant change in recurring revenue (ARR).
• Term Sheets for Major Transactions: Receiving a term sheet for a material capital raise or acquisition, even if the deal is not yet closed.
• Natural Disasters or External Shocks: Events like natural disasters that disrupt operations or supply chains, affecting company value.

FAQs

Here we added common 409A material event questions.

Why do material events matter for 409A valuations?

Material events can impact your company’s fair market value (FMV). If such an event occurs, your existing 409A valuation may no longer be valid, and you must obtain a new valuation to remain compliant with IRS regulations and avoid tax penalties.

Do all funding rounds count as material events?

Yes, most new funding rounds—including sales of preferred or common shares, or convertible debt—are considered material events and require a new 409A valuation.

What happens if I fail to update my 409A valuation after a material event?

Failing to update your valuation can result in non-compliance with IRS Section 409A. This may lead to substantial tax penalties for both the company and its employees, including immediate taxation of deferred compensation and additional taxes.

How do I know if an event is material?

If an event could significantly affect your company’s value, it is likely material. When in doubt, consult your 409A valuation provider or legal counsel to determine if an event qualifies.

What should I do if a material event occurs?

You should promptly contact your 409A valuation provider to arrange for a new valuation before issuing any new equity or stock options

Is the list of material events exhaustive?

No, the list is not exhaustive. Any event that could materially alter your company’s value may be considered a material event. When uncertain, consult with professionals.

Eqvista: Your Trusted Partner for Navigating Material Events and 409A Valuations

Material events can dramatically impact your company’s fair market value and trigger the need for a new 409A valuation to maintain compliance and protect your equity compensation plans. Recognizing and responding promptly to these events is essential for avoiding IRS penalties and ensuring your business remains financially stable.

Eqvista specializes in audit-ready, defensible 409A valuations—offering unlimited valuations for 12 months, handled by NACVA-certified analysts and tailored for startups and high-growth companies. If your company experiences a material event or you simply want to ensure ongoing compliance, contact Eqvista today to safeguard your company’s future with expert 409A valuation services.