409a Valuation Report – Sample & Example

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 409a valuation for startups. 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.

What is a 409a valuation report?

A comprehensive 409a valuation report that establishes the fair market value (FMV) of a private company’s common stock not only provides compliance but also valuable insights into the company’s financial standing and future prospects.

Importance and Use of Valuation Report

• Compliance – Ensures the company adheres to IRS regulations, minimizing the risk of penalties.
• Employee Stock Options – Sets the strike price for stock options, which has tax implications for both the company and employees.
• Financial Decisions – Provides insights into the company’s financial health, aiding in informed decision-making.

Choose a 409a valuation provider who can assist you through potential IRS audits and stand by their valuation report.

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 Eqvista’s 409a valuation report?

Eqvista provides a detailed 409A valuation report that can range from 30 to 80 pages. This report will contain all important details, such as your company’s fair market value (FMV) and summaries of the valuation processes that were followed. We also explain all assumptions made and inputs taken to determine the value of the company.

To make the report accessible, we also explain key concepts like valuation approaches, key revenue rulings, and of course, the IRC Section 409A.

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

1. Summary of Findings

As the name suggests, the summary of findings section will contain the fair market value (FMV) of your company’s common stock. Since valuation figures are influenced by valuation methodologies and assumptions, we indicate the locations of the Statement of Assumptions and Limiting Conditions and the Valuation Analyst’s Representation in this section.

In this section, along with the FMV, we also mention the purpose and scope of the report. Most 409A valuations can only be used for financial reporting and for issuing stock-based compensation in a tax-compliant manner. Here, we will also mention the accounting and valuation professional standards that were followed to prepare the 409A valuation report.

Since 409A valuations from independent valuation experts can help companies get safe harbor protection, we are required to disclose if we have any connection with the company being valued.

2. Introduction

The introduction starts with a reference to the revenue ruling that established the definition of fair market value (FMV). Then, we talk about the nature of the stocks and their options to understand how they should be valued. We will also mention if the company was valued as a going concern or as if it was being liquidated.

In the case of an IRS audit, it is necessary to be completely transparent about the information and methodologies used. Hence, we also mention the sources used.

After this, we also attach an overview of IRC Section 409A for your understanding.

3. Overview of Valuation

In the overview of the valuation section, you will find the value of each equity class, the valuation from all the approaches that were applied, and the discount for lack of marketability.

4. Corporate Profile

The corporate profile includes an overview of the company and its capital structure. The company overview will contain details about when the company was founded, who it caters to, a description of its products, and various other important details. The capital structure is represented in the form of a table showing units held by and the fully diluted stake of each equity class.

5. Industry Overview

When we compile an industry overview, we will cover the general industry your company is operating in and the market segments it is targeting. This industry overview will include factors such as the expected growth rate and relevant trends, including demographic and economic trends, and trends in other industries.

6. National Economy

Typically, the national economy overview covers the ongoing economic cycle in the country. It will cover details like gross domestic product (GDP) growth, inflation, unemployment rates, and interest rates. We may also cover the reasons behind the ongoing economic conditions.

7. Valuation Of The Company

The valuation of the company is preceded by an overview of the valuation methodology and a recap of the valuation approaches. The valuation methodology overview will outline the factors considered in the valuation process and how they were incorporated. The recap of valuation approaches, which describes the market, asset-based, and income approaches, is meant to help you interpret the results of the valuation report.

In this section, we explain why we adopted or rejected certain valuation approaches.

8. Results from Each Applicable Approach

After we have explained the valuation methodology and the approaches being applied, we will show a summary of the valuation process itself. In this sample report, we only needed to show a summary of the market approach to valuation. However, if other approaches are also adopted, we will show a summary of them too.

9. Reconciliation of Value

When multiple valuation approaches are utilized or a privately held company is valued, it is necessary to summarize the valuation process to derive the fair market value (FMV) of the company. At this stage, we will also apply the discount for lack of marketability.

10. Allocation of Equity

Now that you know the value of your company, you must understand how the value is allocated to different equity interests, including the stock options. So, in this section, we cover the recommended methods for allocation of enterprise value to all security holders. Then, we will explain the method we chose to allocate enterprise value. The details of this process are mentioned in the appendix.

11. Conclusion of Value

In the next section, we mention the fair market value (FMV) of the common stock.

12. Premiums and Discounts

The final value of a company may differ from the value established in a valuation approach because premiums and discounts are applied to account for factors such as competitive advantages or lack of liquidity. In this section, we introduce this concept in brief. Then, we note the different discounts and premiums that were actually applied.

In this case, only the discount for lack of marketability was applied.

13. Assumptions and Limiting Conditions

In this section, we state all the assumptions that were used as inputs in calculating the value of your company. We will also note the limitations on how the report can be used. This section includes important points regarding the level of confidentiality and the boundaries of responsibility for the valuation service provider, namely us, Eqvista.

14. Valuation Analyst’s Representation

The purpose of this section is to state the nature of engagement between Eqvista, the valuation analyst, and your company. This section will include declarations of no recent involvement with your company, disclosure of independence from the parties involved, and affirmations for the accuracy of the report.

15. Appendices

The appendices will contain the following information:

• Guideline company information such as product portfolios, trading multiples, and financial information.
• Financial statements of your company.
• A summary of the process followed to allocate value to different equity interests, in this case, the option pricing model.

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 report?

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.

How to choose the right 409a valuation provider?

When choosing a 409A valuation provider, it’s important to look for expertise, audit-readiness, regulatory compliance and competitive pricing. At Eqvista, we excel in all these areas.Our NACVA-certified analysts bring professional experience and certifications to deliver precise, reliable valuations. We perform valuations in-house, ensuring personalized service and cost efficiency. Our audit-ready reports comply with IRS standards, and we stand by you during audits. Discover why Eqvista is the trusted choice for 409A valuations—reach out to us today!

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. For a detailed overview of costs and more insights, visit our comprehensive guide on 409A valuation costs.

Do you offer a sample report I could look at?

Yes, we offer a sample 409A valuation report for you to review—You can download the PDF example. This sample report showcases the key components of Eqvista’s 409A valuation, including methodologies,key assumptions, financial projections, and certifications. It provides a clear understanding of how a 409A valuation report is structured and what information it typically contains.

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.