In which scenario would an investment bank likely utilize a 409A valuation?

A 409A valuation is a specific type of assessment used primarily to determine the fair market value of a company's common stock for tax purposes, particularly in relation to employee stock options. This valuation is crucial to ensure that when companies grant stock options to employees, they do so at a fair price to avoid tax discrepancies that could lead to penalties under the Internal Revenue Code Section 409A.

When a company offers stock options, it needs to establish the fair market value of its underlying stock at the time of the grant. If the options are granted at a price lower than the fair market value, the employees may incur additional taxes and penalties when they exercise those options, as the IRS considers it a violation of 409A regulations. Therefore, obtaining a 409A valuation helps companies comply with these tax regulations and offers protection against potential tax liabilities.

While raising new rounds of funding, considering mergers, and during public offerings may necessitate various valuations, these contexts typically rely on different valuation approaches and methodologies. A 409A valuation specifically addresses the tax implications related to employee compensation through stock options, making it particularly relevant in that scenario.