If we get audited, will our 409A valuation actually hold up?

If you have a well-prepared independent appraisal, you're in strong shape. Here's what "hold up" actually means in practice.

The IRS audit scenario:

The IRS rarely audits 409A in isolation. It usually comes up during a broader examination, or when option exercises generate unusual tax positions. If they look at your option grants, they'll ask for the valuation report and supporting documentation.

With safe harbor (independent appraisal), the IRS must demonstrate your valuation was "grossly unreasonable" — not just wrong, not just aggressive, but grossly unreasonable. That's a very hard standard to meet if the report was prepared competently.

What makes a valuation defensible:

• Qualified appraiser. Real credentials (ASA, CFA, ABV), demonstrated experience in private company valuation
• Contemporaneous. The valuation was prepared at or near the grant date, not backdated six months later
• Well-documented. The report explains its methodology, assumptions, and data sources. If someone reads it cold, they can follow the logic.
• Reasonable methodology. The approaches used are standard in the profession
• Internally consistent. The report doesn't contradict known facts. If you just raised at a $50M valuation, the report shouldn't conclude common stock FMV without acknowledging and reconciling that data point.

The M&A / IPO scenario (more common):

Auditors reviewing your financials pre-IPO or acquirers doing due diligence will scrub your 409A history. They're looking for: gaps in coverage, material events without updated valuations, and conclusions that don't make sense given what was happening at the company.

Bottom line: A good 409A valuation is specifically designed to withstand scrutiny. That's the whole point of the exercise.