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How are 409A valuations calculated?
In broad strokes, a 409A valuation is a three-step process: The first step determines how much a company is worth (i.e. “enterprise value” – more on that below). The enterprise value is then allocated across the various equity classes to arrive at the fair market value (FMV) for the common stock.
What is Section 409A?
Section 409A of the United States Internal Revenue Code regulates nonqualified deferred compensation paid by a “service recipient” to a “service provider” by generally imposing a 20\% excise tax when certain design or operational rules contained in the section are violated.
What is a 409A value?
A 409A is used to determine the fair market value (FMV) of your company’s common stock and is typically determined by a third-party valuation provider. 409As set the strike price for options issued to employees, contractors, advisors, and anyone else who gets common stock.
What is 409A 409A valuation?
A 409A valuation is often (but not always) different from a company’s post-money valuation, which is based on how much investors paid for their ownership stake during a fundraising. Investors get preferred stock, so a post-money valuation is based on the price of preferred shares, whereas a 409A is a valuation of your common stock.
What is IRC 409A and how does it affect stock options?
Internal Revenue Code Section (“IRC”) 409A is a complex regulatory framework that was introduced in 2005. It specifies that private companies are required to issue stock option awards with strike prices either at or over the fair market value.
How can I ensure my property is a 409A safe harbor?
The easiest and most common way to ensure 409A safe harbor is to have a qualified, independent valuation provider conduct the 409A analysis.
How often do I need to get a new valuation?
You will also need a new valuation after raising a round of venture financing, as the previous 409A becomes obsolete once the new round is raised. After that, you should get a new valuation every 12 months and/or when there is a material event which may impact the value of the company, to continue to take advantage of 409A IRS safe harbor.