Have you gotten a business valuation yet? Maybe you don’t know what business valuations are and why you might need a 409A valuation. Well to begin with, a business valuation is a process of finding out the economic value of your company. In short, it helps you get the fair market value of the business, which is the price at which the company can be sold. So, the valuation is obtained to get the sale value of the company, to set up the employee compensation packages, and to establish partner ownerships.
So what is a 409A valuation and how can Eqvista help you?
Why a 409A valuation? Why spend money to get an outsider to do your company’s valuation when you can do it? Because if your company is about to offer stock options to the employees or you are about to issue the common stocks in your company, you legally need a 409A valuation as per the IRS. Ever heard about the 409A valuation report? No problem.
The 409A gets its name from the Internal Revenue Code (IRC) Section 409A. It was an Act introduced in 2004. The IRS imposed this as a lot of businesses were trying to cheat instead of displaying their true earnings, which is notable through the actual common share value in the company. With companies displaying lower share values, they could easily cheat the IRS and pay lower taxes. With the 409A now, the IRS can determine the exact taxes that are to be obtained from those who receive stock from the company.
As per the IRS: Section 409A is applied to compensation that workers earn in a year, but is paid in a future year. This compensation is known as nonqualified deferred compensation. It should be noted that this is very different from the deferred compensation that is in the form of elective deferrals to qualified plans including 401(k) plans and others. In this case, the employee gets the stock option as an option to purchase shares from the company at a discounted rate in the future. And these shares are then taxed. So, the IRS needs to know the amount of the shares so that they can tax employees with the right amount.
The 409A valuation would determine the “strike price”, which is the price at which the employees can buy the equity in the company. And this price has to be equal to or greater than the fair market value as per the IRS. If it is less, then the IRS would impose penalties and fines on the company and those who received the stock.
In fact, there are different kinds of business valuations that are there in the market, out of which 409A valuation is one of them.
What is a 409A valuation used for?
From the above, it might already be clear that a 409A valuation is needed by law. It is considered as one of the compliance rules that a company has to follow as per the IRS. Non-compliance to this can lead to terrible consequences. In short, undervaluing the stock options can result in huge IRS penalties and lost compensation as well.
So, where you were hoping to keep the best talent in your company with compensation; with non-compliance, you will instead pay a lot of back taxes and lose employees in the process. How? Well, let us say you give a low strike price for the options (which means that the employees are paying a lower tax). When the IRS figures it out, they would get the right strike price in place, and add some additional penalties and interests since the right amount was not paid on time. This means that employees, who are already earning less and have been compensated with options, now have to pay a lot more in tax.
No employee would like this. So, you do not just lose money, but also your staff that you were hoping to keep to help your company grow. This would also create a bad name for your company in the market, where you might not find it easy to hire the best talent again. Also, it is crucial to follow the exact rules of how a 409A valuation report needs to be obtained. This means that you will need to get a third-party professional to help you get the value of your company, as per the IRS.
How often do you need a 409A valuation?
It is very simple – if you plan to issue the common stock in your company, then you need to get a 409A valuation done. There are three times when you need it:
- Every 12 months.
- When offering stock options to employees in your company as compensation.
- Anytime your company closes a new funding round.
409a valuation penalties and compliances
As shared above, not pricing your stock options as per the IRS can cause a lot of issues. There are many tax issues that would come for you and your employees. The possible penalties that the IRS would impose for a low strike price include:
- 20% federal penalty
- State penalties and taxes, based on the state.
- The employees would have to pay the regular income tax on the stock options instantly, that is as soon as their options vest. And if the employees are not able to pay the taxes, the IRS would add more penalties and interest over it.
- The IRS tax underpayment penalty and an additional 1% penalty.
That is just a lot of penalties. In addition to this, the company would also face a 409A audit from the IRS. And this would cost the company even more. The company is also likely to face serious questions from the Securities and Exchange Commission, which looks closely at pre-IPO stock awards. Worst case you might have to give up on your business if things go out of hand and you end up bankrupt, which can be a huge possibility. Hence, the best way is to get the 409A valuation done and avoid all this trouble.
Why 490a Valuation from Eqvista is Preferred by Startups and Lawyers?
The next question you need to ask after learning that the 409A valuation is important for every company is – which firm can help you with the most accurate 409A valuation report? And how exactly do you look for a company that would be the best in offering you a 409A valuation that is accurate and IRS-defensible? To help you out here, these are some of the points that you need to check in the company you are hiring as your 409A valuation provider:
- Experienced & Certified valuation specialists
- High-quality, accurate, and audit-ready valuation report that would offer you the safe harbor status.
- Fast and cost-effective valuation (particularly for business in the startup phase): The 409A valuation cost for startups with Eqvista is just $990. Plus, you will get the 409A valuation report in 10-15 working days. You can also opt for expedited service and get the report in less than 5 days.
409a Valuations for Lawyers
409A valuation reports aren’t just for founders, but also for lawyers. Getting the fair market value of the company would help you understand the company better and help in situations where you need to. Eqvista offers 409A valuation reports for lawyers with the following features:
- Detailed reports about the company, cap table, financial statements and analysis, valuation approaches
- Audit Defensible.
409a Valuations for Startups
Every startup needs to get a 409A valuation, and Eqvista can help with it. In fact, Eqvista understands that being a startup means you have limited resources and that is why we have made sure that you can get the service at an affordable rate. So, the 409A valuation report we offer is:
- Audit defensible
- Elaborate and accurate
- Cost-effective – you get a 409A valuation for startups at just $990.
To understand more about how our valuation works, click here!
In addition to this, you can also check your company’s 409A valuation on your own (although it cannot be used to get the safe harbor status) with the help of our 409A valuation calculator here! It is free to use and uses the three most common methods – income, asset, and market approach to get the final value of your company.
In fact, here is how you can use the Eqvista business valuation calculator:
- Gather all the information and add it into the fields as shown in the image:
- You will instantly get the company’s forecast values.
- The next part displays the total value of the company through a graph where you can see a breakdown of the total value based on each valuation method.
Start 409A Valuation Process with Eqvista
Eqvista has a team of certified professionals to help you get IRS-defensible 409A valuation reports. Yes, the IRS has some basic certifications that marks the professionals who can legally help you with your business valuation, and Eqvista is one of those 409A valuation providers. All you need to do is contact us to have the 409A valuation process started, and we will then take care of the rest. Contact us today to know more!