Table of Contents
Are 409A valuations low?
The 409A valuation of employee equity is usually much less than what investors pay for preferred stock; often, it might be only a third or less of the preferred stock price. A 409A does have to happen every 12 months to grant the company safe harbor.
How do you calculate equity in options?
To calculate equity value from enterprise value, subtract debt and debt equivalents, non-controlling interest and preferred stock, and add cash and cash equivalents. Equity value is concerned with what is available to equity shareholders.
What determines the premium of an option?
The option premium is continually changing. It depends on the price of the underlying asset and the amount of time left in the contract. The deeper a contract is in the money, the more the premium rises. Conversely, if the option loses intrinsic value or goes further out of the money, the premium falls.
Are 409A valuations required?
Simply, a 409A valuation is required by law. You need a 409A valuation to ensure your company is in compliance. Non-compliance can have terrible consequences. Undervaluing stock options can result in major IRS penalties and lost compensation.
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.
What is a 409A valuation IRC?
Enter the IRC Section 409A valuation. 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.
When should I get my first stock valuation?
Generally, you should get your first valuation before you issue your first common stock options (typically to your first hire or advisor). 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.