Is 409A valuation required?

Is 409A valuation required?

Internal Revenue Code 409A governs deferred compensation, and it stipulates that a valuation is required any time you are going to be giving out equity in your company over a period of time. IRC 409A includes the rules you need to follow to determine the fair market value (FMV) of your common stock.

Does a safe trigger 409A?

Like a convertible note, a SAFE does not place a valuation on the company at the time of its issuance – merely a cap, if one is used. Thus, for a 409(a) appraisal, there is likely to be little or no impact, since the SAFE exists on the company’s cap table rather than its balance sheet.

Why do you need low 409A valuation?

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​Definition​ A 409A valuation is an assessment private companies are required by the IRS to conduct regarding the value of any equity the company issues or offers to employees. A company wants the 409A to be low, so that employees make more off options, but not so low the IRS won’t consider it reasonable.

How is a 409A valuation done?

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. 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 a 409A valuation report?

409A valuations are used to determine the fair market value (FMV) of your common stock. In other words, they determine the price employees, contractors, and anyone else who gets common stock pay to purchase their stock options.

How do you calculate 409A value?

The best way to undergo a 409a valuation is via an independent, professional appraisal of the company’s FMV done by companies like Carta or Scalar, called the “Independent Appraisal” method.

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When do I need a new 409A valuation?

After 12 months (or sooner, if there’s a qualified financing round or material event), your company will need a 409A “refresh” or updated valuation. Any event that may change the valuation of the company means you need a new 409A. What is 409A safe harbor?

What is a material event under 409A?

Outside of a financing, whether an event is “material” varies case by case. These include acquisitions, divestitures, secondary sales of common stock, business model pivots, and missing or exceeding financial projections. If you aren’t sure, reach out to a 409A valuation provider or consult your lawyer.

What is the 409A safe harbor?

The 409A creates a framework for private companies to follow when valuing private stock. When the valuation is conducted by an unaffiliated or independent party, it establishes a safe harbor, meaning the 409A is presumed to be “reasonable” by the IRS—save for a few exceptions.

Can a privately held company avoid Section 409A deferred compensation?

A privately held company will avoid having a stock option be treated as “nonqualified deferred compensation” under Section 409A if, among other factors, the stock option is granted with an exercise price that is no less than FMV on the date of grant. 2

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