Lowering 409A to Retain Employees
Dave Thornton, co-founder of Vested, on unlocking startup employee equity
Lowering FMV in a downturn is really a way to preserve the value of equity when cash compensation cannot do the job. A lower 409A lets a company issue new option grants or refresh grants with a lower strike price, which makes the same number of options feel more valuable to employees without the company spending more cash. In practice, that is a retention tool, especially when startups are cutting raises, freezing hiring, or asking people to sit through a longer private market cycle.
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The logic is simple. If options are granted when FMV falls, employees pay a lower exercise price later, so more of the exit value belongs to them. That can partially replace cash raises and make it easier to keep employees who might otherwise leave for a public company or a better funded startup.
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This fits a broader shift in private markets. As companies stay private for 10 plus years, equity stops working as a retention tool if it is only paper value. Research on private company liquidity shows companies increasingly use equity design, secondaries, and periodic liquidity to keep employees aligned through a much longer holding period.
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There is also a tradeoff. Issuers often want a low 409A because it makes option grants cheaper, but they also worry that secondary activity or other market signals can push that valuation up and create more admin work. That is why many companies treat FMV changes very carefully and often pair liquidity or repricing decisions with a broader compensation strategy.
The next step is that retention will rely less on one time option grants and more on active equity management. Companies that refresh grants, create controlled liquidity, and help employees turn paper value into real value will have a much stronger recruiting and retention advantage than companies that simply promise upside someday.