409A Valuation

Approaching 409A Valuations the Right Way

Fast Turnaround

Time equals money. We promise to work very hard to meet your timeline and operate within that to deliver a high quality report when you need it. The process of finalizing a valuation required a significant exchange of information and initial ground work from your end in syndicating this information over to us. Provided timely response to those requests, we will aim to complete our draft valuation report within 14 business days.

Accurate Valuation

While we adhere to the generally accepted valuation methodologies and standards, we approach every project with a comprehensive study of our clients: management team, product offering, market positioning, competitive landscape, risk factors, stage of development and more. We adjust our methodologies to account for the above and apply appropriate risk discounts.

Affordable

Our fee is set for us to earn money without compromising on quality, however we refrain from complicated tiered pricing structures that are based on number of financing rounds or investors, or other irrelevant considerations, when in fact the work load is usually the same from our end. We set an affordable price for the first valuation and a much reduced fee for refresh valuations that require significantly less work – it’s only fair….

409A Valuation Explained

IRS code section 409A is regulating the taxation of “non-qualified” deferred compensation for “service providers” (employees. independent contractors and directors). In essence this section imposes a 20% federal tax penalty on deferred compensation that is not exempt from or comply with the provisions of Section 409A.

Non-qualified stock options issued below the Fair Market Value of such options at the time of issuance, will be non-compliant and subject to the above penalties of Section 409A.

Non-qualified deferred compensation plans include: deferred salary, severance arrangements, bonuses, options, RSUs, earnouts and other compensation that is not payable in the tax year in which it was awarded.

Exempt plans include: incentive stock options, restricted stock, short term deferral, Separation Pay Plan, and Qualified Plans (such as 401k, profit sharing plans, 403(b), and Keogh (HR-10) plans).

When is a 409A Valuation Required?

For most start up companies the first time a 409A valuation will be required is when the management contemplates awarding non-qualified stock options to attract and retain talent in the company. In order for those stock options to comply with federal tax code, they need to be granted at or higher than the fair market value of the common stock at time of grant. This is when a company needs a 409A valuation for the first time.

A 409A valuation report is good for one year (12 months of safe harbor) within which all options granted at the designated strike price be considered awarded at FMV. However IRC code 409A requires that a valuation will be performed upon the earlier of (i) 12 months or (ii) when a material event has occurred that would affect the value of the company.

What is a material event?

While no  specific list exists it is common to refer to some of the following events as material: a new round of financing, M&A, widely missed or exceeded projections, major change in business model, major change in customer concentration and litigation activity.

409A Valuation Process


1

Valuation Request

Start by calling us, emailing us or scheduling an appointment. At our first introduction call we will assess the scope of the project, timeline and fees.


2

Sign Engagement Letter

Once an engagement letter is signed, you will receive a detailed information request list


3

Kick off Meeting

Once information is received and reviewed by us, we will hold a detailed discussion to confirm the business model, stage of development, financial projections and anticipated operational milestones, risk factors and more.


4

Deep Background Research

Following the kick off call we will take a few days to digest the information and follow up with more questions that typically arise upon a more thorough review.



5

Modeling and Report Preparation

We start our analysis and input the data, assumptions, and estimates into our models and write a draft report with an assigned initial FMV for all classes of stock.


6

Management Review

After the draft report is issued we hold a discussion with management to receive management feedback, and address any questions or comments.


7

Finalizing Report

We incorporate relevant client feedback and insights into our final report.


8

Certificate Issued

A signed and certified copy of appraisal report is issued.


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