How does 409A valuation work?

How does 409A valuation work?

A 409A is an independent appraisal of the fair market value (FMV) of a private company’s common stock, or the stock reserved for founders and employees. This valuation determines the cost to purchase a share. Long story short: You can’t offer equity without knowing how much a share is worth.

When do you need a 409A valuation?

409As, which refer to the Internal Revenue Code Section 409A, are regulated by the IRS. To take advantage of the IRS safe harbor (i.e. not be subject to certain IRS penalties), 409A valuations should be done annually or each time the company has a material event, like a new financing.

What is 409A valuation of stock options?

As mentioned above, 409A is not the same as a simple valuation, and it is normally done when the company is about to offer the stock options as an equity compensation to their employees or offer stock options to the contractors or investors. The 409A is a section that comes under the US tax law.

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What is 409A 409A used for in accounting?

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 the difference between a 409A and a post-money valuation?

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. Preferred stock usually has certain attributes that make it more valuable than common stock.

How to become a professional 409A valuer?

And well, there are no specific requirements for certification to become a professional 409A valuer. Nonetheless, as per the IRS, it is important that you have enough significant and relevant knowledge, training, education, and experience to be able to perform a 409A valuation on your own.