Why Startups Need Both 11ua and 409a Valuations for Compliance

Startups often juggle multiple financial and legal requirements, and valuations are among the most critical—yet misunderstood. Two key IRS-mandated appraisals, 409a Valuations and Rule 11ua Valuations, serve different but equally vital roles.

409a valuations determine the fair market value (FMV) of private company stock for equity compensation.
11ua valuations apply to international transactions, ensuring proper transfer pricing and Contributory Asset Charges (CACs) for tax compliance.

Ignoring either can lead to IRS penalties, legal disputes, or overpaying taxes. This guide explains why startups need both and how they work together.

What is a 409a Valuation?

A 409a valuation is an independent appraisal of a private company’s stock to establish its fair market value (FMV). The IRS requires it under Section 409A to prevent companies from undervaluing stock options, which could lead to tax avoidance.

When Do Startups Need a 409a Valuation?

Issuing employee stock options (ESOPs)
Raising funding (VCs often require an updated 409a)
Mergers, acquisitions, or IPOs
Annually (since valuations expire after 12 months)

Consequences of Skipping a 409a Valuation

20% IRS penalty + interest on deferred compensation
Disqualified equity grants, leading to employee disputes
Investor skepticism during funding rounds

What is an 11ua Valuation?

The Rule 11ua valuation is a newer IRS requirement (introduced in 2023) targeting international transactions and transfer pricing. It ensures that startups with cross-border operations properly value intangible assets (like IP or patents) and apply contributory asset charges (CACs).

Key Aspects of an 11ua Valuation

Focuses on transfer pricing compliance (avoiding tax evasion claims)
Calculates contributory asset charges (CACs)—fees for using intangible assets across borders
Required for companies with overseas subsidiaries, licensing deals, or global operations

Who Needs an 11ua Valuation?

Startups with foreign subsidiaries
Companies licensing IP internationally
Businesses subject to OECD transfer pricing rules

Why Startups Need Both 11ua and 409a Valuations

While 409a focuses on internal equity pricing, 11ua ensures global tax compliance. Here’s why startups often require both:

Scenario	409a Needed?	11ua Needed?
Issuing stock options to US employees	✅ Yes	❌ No
Licensing software to a foreign subsidiary	❌ No	✅ Yes
Raising VC funding while expanding globally	✅ Yes	✅ Yes

Case Study: A Tech Startup’s Compliance Challenge

A SaaS startup with engineers in India and US-based sales needed:

409a valuation – To issue stock options to US employees.
11ua valuation – To justify transfer pricing for its India-based development costs.
Without both, it risked IRS audits on stock compensation and international tax penalties.

Key Differences: 11ua vs. 409a Valuations

Feature	409a Valuation	11ua Valuation
Purpose	FMV for equity compensation	Transfer pricing & tax compliance
IRS Rule	Section 409A	Rule 11ua
Applies To	Private US companies	Companies with cross-border transactions
Key Focus	Stock options, common stock pricing	Contributory asset charges (CACs), intangible assets
Penalties for Non-Compliance	20% IRS penalty + interest	Transfer pricing adjustments, double taxation

Common Compliance Mistakes Startups Make

Assuming 409a Covers Everything – It doesn’t address international tax risks.
Using Outdated Reports – Both valuations expire (typically after 12 months).
Ignoring Contributory Asset Charges (CACs) – Leads to IRS disputes on transfer pricing.
DIY Valuations – The IRS often scrutinizes self-prepared reports.

How to Get Started with 409a & 11ua Valuations

Find a Reputable Valuation Provider – Look for firms specializing in 409a valuation services and Rule 11ua valuation reports.
Update Annually (or After Major Events) – Funding rounds, global expansions, or new IP licensing may trigger revaluations.
Document Everything – Maintain audit-ready records for IRS scrutiny.

Conclusion

Startups operating in today’s global economy must navigate both 409a Valuation (for equity compliance) and 11ua valuations (for international tax rules). Ignoring either can lead to costly IRS penalties, investor mistrust, or legal disputes.

Next Steps:

If issuing stock options → Get a 409a valuation.
If expanding globally → Consider an 11ua valuation.
Consult a valuation expert to ensure full compliance.

By staying proactive, startups can avoid financial pitfalls and scale with confidence.

FAQs: Answering Google’s Top Questions

1. Is an 11ua valuation mandatory for all startups?

No—only if your startup engages in cross-border transactions, such as having foreign subsidiaries or licensing IP internationally.

2. How much does a 409a valuation cost?

Typically $2,000–$6,000, depending on company size and complexity.

3. What are contributory asset charges (CACs) in 11ua?

Fees assigned to intangible assets (like patents or software) when used across borders to ensure proper transfer pricing.

4. Can the same firm do both 409a and 11ua valuations?

Yes, but ensure they have expertise in both IRS compliance areas.