Section 409A of the Internal Revenue Code regulates the treatment of non-qualified deferred compensation to service providers for federal income tax purposes. A company must issue stock options at fair market value in order to legitimately benefit from this section of the code and will typically hire a third-party agency to issue a report determining exactly what that is. The report is commonly known as a 409A valuation and they are critical to issuing stock options for a venture backed company. Most startups order at least one per year, or after a material financing event, whichever is sooner.
We have to get our 409A valuation completed before we can issue the next round of options.