409a Valuation Report – Sample & Example

Let us begin by understanding what the 409A valuation report is all about.

Companies, especially startups, use 409A valuations to price their options for their employees. This means that the 409A valuation report determines the common stock share price. This report is normally created by an independent third party qualified to offer startup 409A valuation services. To ensure that you get an accurate report that gives you safe harbor status, you need to work with the right firm. That is where Eqvista comes in.

409a Valuation Report

A 409A valuation is an appraisal of a private company’s stock to prepare for issuing shares, which displays all the details of this valuation process.

What is a 409a valuation?

A lot of companies offer shares to their workers as an incentive. This equity is often in the form of options. But private companies that want to issue options to their workers have to be appraised (valued) as these companies do not have the share prices available everyday, unlike public companies. Getting the value of the common shares in a company that complies with IRS tax rules is called a 409A valuation. Failure to get the 409A valuation can cause trouble for the company with the IRS. It would also add hefty penalties for your employees as well.

Just to be clear, the IRS does not allow companies to simply make up a valuation. So, as per the Section 409A tax code, the company has to hire a third-party appraiser who has the needed experience to get the company valued with the valuation methods - See IRC 409a. The share value obtained from this valuation is considered the "Fair market value" of the share, which is the price at which the company would be sold.

What is a 409a valuation report?

It is clear that the 409A valuation report is a valuation prepared by an independent appraisal of the fair market value (FMV) of a private company’s common stock. The 409A valuation permits the private company to comply with section 409A of the IRS tax codes that regulate non-cash compensations. This report is the conclusion of the total company’s value, which the share price is derived from.

Examples of when a company needs a 409a valuation

Companies are required to complete a 409A valuation once in every 12 months, especially must do 409A valuation before issuing their first stock options to employees or any significant changes happen to the company. The entire valuation process will complete in 2-3 weeks and valid up to 12 months.

Certain circumstances may trigger the need for a new 409A valuation, this happens in situations like, when a new funding round or preparing for IPO, sale or other Liquidity event, significant change in revenue or profitability, mergers or acquisitions or during any strategic changes happen in the company.

Obtaining a proper 409A valuation is critical for companies issuing stock options, as it helps to ensure compliance with tax regulations and avoid potential penalties. For example after several rounds of funding, a company needs a 409A Valuation to reduce the complexity in the cap table.

409a Valuation Report Sample

Just to be clear, there is no specific kind of “template” or sample 409a valuation report that is used. Every company has its own way of sharing information. Moreover, since the IRS did not give any specific guidelines as to everything that a startup 409A valuation report should hold, there is no definitive kind of template. But there are some main points that need to be included in the report, including the valuation, the methods used, and all about the company that helped the firm reach the conclusion of value.

But a lot of companies also want to understand how their company compares to others in the industry. So, a 409A valuation is not just about getting the value of the company as of today. It is about considering the larger picture of the environment and the economy in which the company is operating, to help build an accurate picture of how much the company should be valued at the moment.

What’s included in our (Eqvista’s) 409a valuation report?

Eqvista offers the most accurate and high-quality 409A valuation report. Our report would hold all the main details that would not just help you learn about the FMV of the company shares, but also about the methods that we used and how we analyzed everything. You will be able to get all the information from the capital structure of the company to the company’s industry. The overall report would have around 40 to 80 pages.

Here is a list of things you would find in a 409A valuation report from Eqvista:

#1 Summary of findings

This section of the 409A valuation report would discuss the findings and present the value for the shares of common stock. Typically, this is the section that the company management cares most about. However, the next sections are also crucial in making the IRC 409A valuation defensible when it is audited.

Summary of findings - 409a valuation report

#2 Overview of valuation

This section would display the details of the methods used for the valuation and what the outcome was. It would also reveal the difference in each method, including the asset, income, and market approaches’ output.

Overview of valuation - 409a valuation report

#3 Corporate history

This part describes the company and its history. It gives all the details about its product offering, market share, competition, and future growth outlook. The Eqvista 409A valuation report would hold the following sections under this:

  • About the company – its history, and capital structure
  • Company products – This would have the information about the products and/or services that the company offers.
  • Competition – This would include the information of all the company’s competition.

#4 Management and Ownership

This part talks about the kind of management that the company has. It also shares details on the equity structure of the company. Along with this, you will also get details on the key employees and the management structure in this section. Here are the subsections of this part that you will find in the Eqvista 409A valuation report:

  • Management – This part would talk about the management in the company and the key employees.
  • Company specific ownership plan or key investments – this section discusses any ownership plan or stock option plan specific to the company, or its key investments.
  • Future Outlook – This part would talk about the future plan of the company and how it sees itself in the future.

#5 Capital structure

This section would help you understand the capital structure of the company through tables and charts. You will be able to see the various kinds of equity securities and classes that make up the company’s capital structure. This section would also include the company’s income statement and balance sheet.

Capital structure - 409a valuation report

shareholders - 409a valuation report

#6 National economy

This section talks about the national economy of the company and the company’s industry. It shows the output and effects of the industry on the economy and how the economy has changed in the last few years.

#7 Industry

It is imperative for the evaluator to give all the details about the industry and the product/service that the company offers. This is because this information is used to understand the leaders in the industry and what is the scope of the company in the industry. It also helps to understand the kind of products and services that the market offers.

#8 Financial analysis

This section gives the financial analysis of the company using the historical income statements and balance sheet of the company as shared in the sections above. It would also include the common size financial statements compared to others in the industry.

#9 Other Sections

The other sections in the Eqvista 409A valuation report that you will come across include:

  • Income Approach – In the income approach, a business is valued at the present value of its future earnings or cash flows. And this is used to get the final value of the company along with the values of the other methods.
  • Market Approach – The market value approach business valuation is a process where a value is assigned to a business based on market forces in comparable situations.
  • Asset Approach – This valuation method examines the total value of the assets in your company.
  • Capitalization Rate – The capitalization rate, also known as cap rate, is used in the business world to indicate the rate of return that is expected to be generated on an investment.
  • Discounts – This normally includes the Discount for Control (DOC) in case of valuations for minority positions, or Discount for Lack of Marketability (DLOM) for private companies.
Download our sample 409A valuation report to see what the complete report would look like and how it would help you. Feel free to contact us about offering you a high-quality startup 409A valuation report today!

How to choose the right 409a valuation provider?

Before you choose one of the 409A valuation providers for getting your company’s 409A valuation report, here is what you need to look for:

  • Experience – The first thing you need to check is if the company you are about to hire has the required expertise to get an accurate 409A valuation. Also, check if they have any certifications, which would prove that they have the needed knowledge and experience. This would help you understand if it is worth it or not.
  • Service – Find out if the company you are about to hire does the valuation in-house or outsourced it. It is better if they are doing it in-house, as you are sure about the person working for you and you will be given an affordable price as well.
  • Technology – Even though this might not seem important, it is very important. The company you are about to hire for your 409A valuation report needs to have the right tools that use the latest technology. So, ask them if they connect to your company’s cap table. Also, ask them if they use the needed technology to speed up the process and reduce errors.
  • Audit-readiness – The 409A valuation report that you get should be audit-ready since the IRS can strike at any time. Moreover, the firm that offered the report has to be able to stand with you when there is an audit to prove the valuation.
  • Regulatory Expertise – Ensure the valuation specialist has a comprehensive understanding of regulatory requirements and standards related to 409A valuations. They should be familiar with IRS guidelines and maintain strict adherence to valuation reporting standards.
  • Cost – Compare the cost of services offered by different valuation specialists. Factors that impact the cost include the stage of the company, the number of shareholders, assets and overall value of the company.

Not all companies offer a comprehensive report for the 409A valuation. But at Eqvista, we don’t just offer you great services, we also offer it at an affordable price.

You can talk to us before you hire us for preparing your 409A valuation report. It is always important to be sure before moving ahead and we will help you in assuring you of our services.

How much does a 409a valuation cost?

Our valuation services begin at $990 and increase based on the stage at which your company is in. So, we do not just offer quality, but also affordable prices as well. Our experts would take care of your 409A valuation in an audit-ready way.

Here is a break down of the 409A valuation cost based on the stage your company is in:

Startup Funding LevelEqvista 409A Valuation CostWhat Others Charge
Startup $990$2,000
Seed Stage$1,290$3,000
Series A$1,990$3,500
Series B$2,490$4,000+
Series C$2,990$5,000+

We also offer an expedited service of 409a valuation at $390.

Note: Our 409a valuation pricing tiers are based on funding rounds, but may vary depending on other factors including: total revenue, number of employees and capital structure. e.g. A closely held company with sales of $5 million, 50 staff, and no previous funding, may be equivalent to a Series B company. Tell our staff more information for an accurate quotation.

In short, the 409A valuation cost at Eqvista is quite reasonable as compared to what others are offering. If you are interested in getting a 409A valuation report from us, please feel free to contact us. If you want to see how the report looks, you can also download our sample 409A valuation report. Moreover, to get more information about how the 409A valuation works and why you need it, download our 409a valuation brochure!

FAQs

We have prepared a list of frequently asked questions about 409A valuation. These questions cover common concerns individuals and businesses may have regarding this valuation:

What is the purpose of the 409A Valuation report?

The purpose of the 409A Valuation report is to determine the FMV of a private company’s common stock, to establish strike price for options, to ensure compliance with section 409A of the IRC and to provide safe harbor protection for the company.

What are the key components of a 409A valuation?

The key components include valuation summary, valuation analysis, calculation exhibits, certification, valuation date, methodologies used, assumptions and projections.

What are the legal implications of not having a 409A valuation report?

Legal complications include, penalties and taxes for the company and employees, reputational damage and legal risks, loss of safe harbor protection and the inability to properly price stock options.

What information is required to obtain a 409A valuation report?

A 409A Valuation report requires general company information, Financial statements, capitalization table, stock option agreements and grants, Management and team information, valuation date, expected deadline for report, Details about recent and planned financial rounds.

By thoroughly reviewing the valuation summary, you can gain a clear understanding of how the valuation provider arrived at the final FMV determination. This will help you identify any potential issues or inconsistencies in the report and ensure the 409A valuation accurately reflects your company’s position.

Streamlining The Valuation Report Process With Eqvista!

A thorough and compliant 409A valuation report is essential for private companies to properly manage their equity compensation and avoid potential issues with the IRS. Eqvista’s 409A valuation process is efficient, with a dedicated analyst handling the entire procedure and delivering the report within a short time frame. Eqvista offers 409A valuation services starting at $990, with unlimited 409A valuations for 12 months.

When it comes to the 409A Valuation report, Eqvista’s process is comprehensive and audit-ready. It includes details of the FMV of the company shares, the methodologies used, and a thorough examination of the company’s capital structure and industry.

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