What is a 409A valuation?

A 409A valuation is an appraisal that determines the fair market value (FMV) of a company's common stock. It's named after the section of the U.S. tax code that sets rules for nonqualified deferred compensation plans issued by private companies, such as stock options or restricted stock units.

What is the point of 409A?

A 409A valuation determines a private company's FMV which is then used to set the strike price for employee stock options or the baseline value of synthetic equity awards. Section 409A of the Tax Code contains the requirements that must be followed when valuing private stock.

What is a 409A valuation in the UK?

A 409a valuation is required by the company when it doesn't know the value of the stock. For example, If you want to sell a table but don't know how much it's worth, you sell it to anyone. Using the same analogy, a 409a becomes vitally important if a firm intends to offer equity.

What is a 409A for dummies?

A 409A plan is a type of non-qualified deferred compensation plan that allows high earners to save more for retirement. The compensation saved in these plans isn't immediately taxable because it is earned but not yet received by the employee.

How to perform 409A valuation?

What’s a 409A valuation, and why does it matter?

Why is a 409A valuation required?

Since 2004, a 409A valuation is required by law (IRS Section 409A was passed as part of the American Jobs Creation Act) if a private company issues equity or options. Non-compliance can have serious consequences. Undervaluing stock options can result in IRS penalties and lost compensation.

How long does it take to complete a 409A?

Experienced firms with a streamlined process can often complete valuations more quickly than those without a specialized focus on 409A valuations. That's why we can guarantee a 10-day turnaround. All of our valuators know the process inside out and can apply it to different timeframes.

What does a 409A valuation look like?

This report will contain all important details, such as your company's fair market value (FMV) and summaries of the valuation processes that were followed. We also explain all assumptions made and inputs taken to determine the value of the company.

Can you do your own 409A valuation?

While technically you can attempt to come up with a valuation yourself, it is highly recommended to engage an independent, qualified third-party appraiser. This is because the IRS is more likely to respect a valuation performed by an independent party with the appropriate credentials and experience.

Does 409A apply to non-US taxpayers?

As the United States imposes income tax on the worldwide income of US citizens and resident aliens, §409A applies to every employee subject to US taxation worldwide who participates in a deferred compensation arrangement – either globally via a non-US multinational or through a local affiliate in a country other than ...

How long is a 409A valid for?

409A valuations are only valid for at most twelve months from the valuation date, or earlier if a company's board of directors has reason to believe that the 409A valuation is no longer valid (e.g. if they receive a term sheet at a materially different valuation).

How much does it cost to get a 409A valuation?

The 409A valuation cost greatly varies, depending on the provider and the service agreement. Generally, they can cost between $1,000 and $5,000. But as your startup receives multiple rounds of funding and moves to Series A, B, or C companies, the valuation cost also increases.

Why are 409A valuations so low?

For example, a company might have a lower 409a valuation due to its products, which are still in trial. However, the company may have a higher post-money value as investors will consider its market potential and success after the product's approval.

Are 409A valuations conservative?

A 409A valuation is a conservative estimate of what your company's common stock is worth today. It's based on your current financials and market conditions, and it's used to set the strike price for employee stock options (mainly for IRS compliance).

How to avoid 409A?

Is 409A the same as FMV?

FMV is the broader financial concept, while a 409A valuation is a specific, defensible method to determine FMV for issuing stock options in private companies. For startups, the safest route is to treat 409A valuations as a legal and compliance requirement, and FMV as the foundation of sound equity planning.

Is 409A valuation mandatory?

As a founder, you need this valuation to ensure that your stock options are issued with an exercise price at or above FMV, which is a requirement under Internal Revenue Code Section 409A to avoid adverse tax consequences for option holders.

What questions are asked in a 409A valuation interview?

How do you manage multiple projects at once? Tell me about a time you had to deal w/an angry customer? When determining FCF in a DCF model, why do you add back depreciation and amortization (D&A)?

How much does a carta cost?

What is the cost of Carta? Carta's pricing starts at $280 per year for the Launch Plan, with custom cost ranging anywhere from $6k-$77k for higher tiers based on company size and needs. 2.

Can you issue options without a 409A?

Options should be granted at an exercise price at or above the fair market value (FMV) of the underlying common stock on the date of grant. If you don't have a 409A valuation report, you'll end up guessing the FMV of your common stock, which puts the option recipient at significant risk.

What is the difference between valuation and 409A?

The 409A valuation establishes the base price of a company's common stock—which informs the price at which employees can exercise their stock options. The key difference between 409A valuations and valuations in a financing round is that 409A valuations aren't based on market demand.

What are the risks of 409A?

Failing to obtain a 409A valuation can lead to significant tax issues for your employees, as options might be deemed underpriced and therefore subject to immediate taxation along with a 20% federal penalty tax and potential state penalties.

Who performs a 409A valuation?

An independent appraiser who can ensure the 409A uses a safe-harbor method should perform the valuation.

How long does a 409A last?

A 409A valuation should be updated at least once every 12 months or if earlier, after a material event that could affect your company's value, such as a new round of funding or secondary sale. It's important to maintain current valuations to remain compliant with the tax code.

Why are high valuations bad?

Overvaluation also impacts potential returns for investors. Venture capitalists want to generate high returns, and an overvalued company may be less appealing because the upside is more limited. If the valuation is already inflated, the chance for a significant return might not be as strong.