409A Valuation for Indian Startups: When You Need One, and When You Do Not

A 409A valuation is a United States requirement, and a purely Indian company does not need one. That sentence saves more founders more money than anything else in this guide, because being told you need a 409A when you do not is common, and acting on it is expensive.

What is true is that a company with a US parent, a Delaware structure, or employees receiving US-taxable equity may genuinely need one – sometimes alongside an Indian valuation, not instead of it. This guide sets out which situation you are in.

What a 409A valuation actually is

Section 409A of the United States Internal Revenue Code governs deferred compensation. For a private company granting stock options, it requires that the exercise price is at least the fair market value of the common stock on the grant date. Getting it wrong exposes the employee – not the company – to penalty tax on income they have not yet received.

Companies establish that fair market value through an independent appraisal, which creates a safe harbour: the valuation is presumed reasonable unless the tax authority can show it was grossly unreasonable. In practice, that appraisal is refreshed at least every twelve months and again after any material event, most obviously a priced funding round.

Why the 409A number is lower than your investor valuation

Because the two value different things. Investors buy preferred stock, which carries liquidation preference, protective provisions and other rights. Employees hold common stock, which has none of those and is also illiquid. A 409A values the common; a funding round prices the preferred.

The result is that the 409A comes in well below the headline round valuation – commonly a quarter to a half of the preferred price, though the ratio is strongly stage-dependent and moves toward the top of that range as a company matures or a priced round gets closer. A lower defensible 409A is good news, not bad: it means a lower strike price and more upside for your team. Our guide to 409A versus investor valuation goes into where founders get this wrong.

The Indian position, which is what most readers actually need

An Indian company issuing ESOPs works to the Companies Act, 2013, not to the US Internal Revenue Code. Options are issued under section 62(1)(b) with Rule 12 of the Companies (Share Capital and Debentures) Rules. The valuation supporting the exercise price must come from an independent valuer registered with the IBBI under section 247.

That last point changed recently and a lot of published guidance has not caught up. The SEBI (Share Based Employee Benefits and Sweat Equity) (Second Amendment) Regulations, 2025 amended Regulation 34(1) so valuations under the 2021 Regulations must be carried out by an independent registered valuer, removing the merchant-banker route. It took effect on 2 January 2026, with a nine-month window only for assignments already in progress.

Separately, for accounting, the option’s fair value at grant is computed under Ind AS 102 – normally with Black-Scholes – and expensed across the vesting period. That is a different calculation from the share valuation, and treating them as one job is the most common ESOP accounting error. See ESOP valuation services in India for how the two fit together.

When you need both

Three situations recur. A Delaware or Singapore holding company over an Indian operating subsidiary, where the US entity grants the options: the holding company needs a 409A, and the Indian subsidiary may still need Indian valuations for its own filings. US-based employees or contractors receiving equity in a structure with US tax exposure. And a flip in progress, where the structure is mid-transition and both regimes are live at once.

If none of those describes you, and your company is Indian with Indian shareholders and Indian employees, you need an Indian valuation signed by a registered valuer. You do not need a 409A, and you should ask anyone selling you one which specific US exposure they think you have.