Market pricing for strike price setting and tax
Fair market value is the price at which a share would change hands between a willing buyer and a willing seller, neither under pressure to act, with reasonable knowledge of the relevant facts. It matters most for setting a defensible strike price for employee options and for tax reporting, since setting the strike price too low relative to fair market value can create unexpected tax charges tied to the price per share used at grant.
409A in the US versus European practice
In the United States, companies commonly obtain a 409A valuation, a formal independent appraisal used to set a defensible strike price under US tax rules. This is a US specific requirement and does not apply to European companies. Instead, UK companies operating an EMI scheme can agree a valuation with HMRC in advance, giving certainty over the value used to set stock option strike prices. Companies in other European countries typically commission an independent valuation report from an accountant or valuation specialist, or rely on the price of the most recent funding round as a reasonable proxy.
Rules and required processes vary by country and by scheme type. This is general information, not tax advice, and current local rules should be checked before setting a strike price, particularly given how much equity tax treatment varies across Europe.
Methods used to determine fair market value
| Method | When used |
|---|---|
| Most recent funding round price | Company raised a priced round recently |
| Independent valuation report | No recent round, or a more defensible number is needed |
| HMRC agreed value (UK EMI) | UK companies granting EMI options |
| Board determined value with support | Very early stage companies with no external data points |
Questions on setting a defensible share price
- Do European companies need a 409A valuation?
- No. 409A is a US tax concept. European companies use independent valuation reports, HMRC agreed values for EMI in the UK, or recent round pricing instead.
- How often should fair market value be reassessed?
- Commonly at each funding round, and periodically, such as annually, if there has been no recent round but significant time has passed.
- What happens if a strike price is set below fair market value?
- It can trigger unexpected tax consequences for the employee or the company, depending on the jurisdiction and scheme, since the discount may be treated as taxable value.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.