Important information & documents for 409a valuation

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Haven’t yet found the proper details on what information and documents you would need for a 409A valuation? Well then, you have come to the right place. The moment you are thinking of giving out shares in your company, either for raising capital or for offering employee compensation, you are required to have a 409A valuation performed to know the value of your company.

To be clear, the IRS section 409A valuation is an independent appraisal of FMV (fair market value) of the common stock of the company. And this value is what would determine the strike price of the equity in a company, which is also why you would need the 409A valuation before you can offer your company’s stock new shareholders.

Unlike public firms whose value is set by the market, private companies need the services of an independent appraisers for getting the value of their company. Only under certain conditions can this be someone in the company. Often a company would need to hire a third party so that the 409A valuation can be valid per the IRS regulations.

This is where Eqvista comes in. Eqvista has a team of highly qualified professionals who have come together to offer you the services you need for issuing and managing equity in your company. And with experience in offering 409A valuations for companies, the process and cost has become faster and more affordable for businesses looking to issue their company equity.

But even after all this, some companies tend to make mistakes by not providing the complete information for their 409a valuation, thus causing errors in the value of the company. To help you know what is important and what you would need to give for the process, read on!

What information is needed for a 409a valuation?

For being able to perform a 409A valuation of your company, it is important to get a clear picture of your company. Basically, the valuation is done to know how much a person would pay for 1 share of your company’s common stock. And for being able to understand this, a lot of key factors are looked into (which is also what the IRS and investors look into if and when they evaluate a company).

To determine the value of your company, you would have to give a lot of information about yourself and your company such as the company background details, financial details, and a lot more. To help you better understand this, here is the information that would be required from you if you are about to have your 409A valuation performed:

#1 Valuation date

The valuation date is the time when the asset or company would be assigned a value in dollars. This term is used when the valuation of an asset needs to be made before it is distributed or when there is a periodic determination of worth for reporting purposes. It is important to give the valuation date as per the IRS rules for the 409A valuation process.

Also to clarify, the valuation date is not the same as the 409A valuation report delivery date. You can learn more about this at the end of this article.

#2 General Company information

You would also have to share all the details of your company. It can be in any form. You can create a company presentation, or an executive summary, or even a detailed business description. These things would help in the valuation as the person analyzing all would need to know everything about your company.

Other than this, you would also have to share details like:

  • What does your business do?
  • How does your company make money?
  • In case your company is not yet profitable, how does it plan to make money later on?
  • What are the dynamics of the industry?

All these things would help in understanding your company better. In short, it would help the analyst in choosing the right method for getting the 409A valuation for your company.

Note: If you feel that you prefer to have a call and explain everything about your company, give us a call. It would help the analyst ask questions and clear all doubts the person has while understanding all about your business. In short, it would help learning all about your business in a better way.

#3 Expected deadline for valuation report

Another thing that you would need to provide is the last date for when you would need the valuation report ready for whatever reason you need it. It would help the analyst schedule the process and timings to have the 409A valuation done for you on time.

#4 Three comparable public companies

The analyst would also need the names of your competitor companies. Hence, you would need to select and provide them with the most appropriate comparable companies for their analysis. In case your idea is something new and you do not have any competitors, select the companies that are related to what you offer so that the analyst can make something out of it.

#5 Recent and planned financial rounds

For the analyst to calculate your company’s value as per the 409A valuation rules, you would have to give all the financial statements of your company. These details would include the financial documents including the income statements, cash flows and balance sheets for the past 5 years of your company.

In case your company has been in business for less than 5 years, you would have to give all the financials for as long as your business has existed, that is from the incorporation of your company. Also, in case your company has any forecasted revenues, you would have to provide the analyst with the projected revenue, expenses and tax rate for the next 5 years. This information would be used to do a discounted cash flow calculation during the 409A valuation process.

#6 Any secondary transactions

Other than the financial details mentioned, you would also have to give the year to date financial statements along with a trial balance up to the valuation date. If there are any subsidiaries in your business, you would also have to submit the papers for these businesses as well.

#7 Any convertible securities

You are also required to give all the information related to the other financial aspects of your company such as the equity. So, in case you have raised a convertible debt or equity in your company, you would have to submit all the associated documents and the terms of the investment. This is the reason why it’s important to keep all the details of your company’s equity update in the Cap Table. You can use Eqvista to help you manage and stay on top of all your company’s shares.

Additionally, you would need to share all the details of the valuation, the total number of shares issued, and any other special rights like the dividends, liquidation rights, voting rights and others. You would need to also share about the short-term and long-term debt that the company might have.

If you have had a 409A valuation before, you would also have to share all the previous valuation reports and information.

What documents to provide for the valuation?

Now that you know all the 409a valuation information that you would have to share with the analyst, let us find out about the additional documents you would have to share. To be clear, you would have to offer a fairly extensive list of documents to the analyst so that the 409A valuation can be done right. The list shared below is what you would be expected to give to get the valuation performed properly.

This is not an exhaustive list, and there may be more or less documents needed, depending on the valuation appraiser doing your 409a valuation. So, don’t be surprised if you are asked for additional documents other than the ones shared below:

#1 Cap Table

The very first thing that you are expected to share is the cap table (also called the capitalization table) of your company. To explain, a cap table is the table of the company that offers an analysis of the percentage of ownership, the value of equity in each round of investment, the equity dilution, the investors and any other owners that the company has in it. It is basically based on the equity in the company, and lets you know who owns what and how much of the company along with why they own it.

This is an important part for getting the 409A valuation of your company, which is why you should have a cap table ready to give your analyst. Moreover, if you are a member on Eqvista and are using our application, you can get the downloaded documents from there. Or if you need our help with the 409A valuations, just let us know about your company profile on our application while analyzing and determining the 409A valuation for your company.

#2 Last articles of incorporation & company bylaws

The next document that you would have to provide for your 409A valuation is your company’s corporate documents which include:

  • The Articles of Incorporation: This is the document that you get when you register your company for its incorporation in a state. In short, it is a set of formal documents that have been filed with the government to legally have a company incorporated. The Articles of incorporation holds the company’s name, address, agent for service of process, and the amount & type of stocks that the company has.
  • Company Bylaws: As soon as the company is formed, the board of directors is formed as well, and they are then liable to decide the bylaws of the company. The company bylaws are used to direct the operations of the company throughout the life of the corporation. To explain better, the company bylaws are the rules that govern the company. It is like a single document where some rules and regulations are created for the company to follow.

If your company has run for a long time and you have made changes to your Articles of Incorporation from the time your company was incorporated, you would have to provide the Amended and Restated Articles of Incorporation for the 409A valuation process.

Note: These documents are needed by the valuation analyst to learn all about the company and its features such as the various types of securities that the company’s capital holds. Additionally, you should give the most updated documents to make the process simpler. Providing an outdated document would cause the analyst to spend more time in finding out about the company. Hence, it is advised to always give the latest documents to have the 409A valuation completed on time.

#3 Balance Sheet at or around valuation date

You would also have to provide your company’s balance sheet. To help you understand better, a balance sheet is the financial statement of your company that reports all the assets, liabilities, and equity of the shareholders at a specific time of your company. It basically offers a basis for computing the return rates and then evaluating the capital structure. It shows all the details of what the company owns and owes along with the amount that the shareholders have invested in the company.

This document is used alongside the other important financial statements like the cash flow statement and the income statement for calculating the financial ratios or fundamental analysis.

Note: Getting the 409A valuation means figuring out the value of the common shares and this means that the analyst would have to value everything in the company from the equity to every other asset in the company. This is why an up-to-date balance sheet is required.

On the contrary, the balance sheet would have no value in case your company just completed the equity financing. Basically, the value of the common stock in the company will now be estimated from the preferred shares value estimate that was done for the equity financing. But at times, the analyst still do ask for the balance sheet.

#4 Last 3-5 years of financial statements (Income, Balance Sheet, Cash flow statement)

As mentioned above, you would have to give the balance sheet along with the income statement and the cash flow statement. Other than these, there are some other financial details you would have to share.

All new companies have to share the following, even if they have been incorporated just two days ago:

  • Year to date Income Statement until the valuation date
  • Trial balance
  • Balance Sheet as of the valuation date

Moreover, in case your company has been in the market for more than a year, you would need to provide the following:

  • 5 years of Statement of Cash Flows (or since incorporation)
  • 5 years of Balance Sheets (or since incorporation)
  • 5 years of Income Statements (or since incorporation)

Note: Normally, these financials are not used directly in the valuation metrics, although they are highly important documents that should be given to the valuation analyst. This would help them learn more about the client or use it when there is a sanity check when the Discounted Cash Flow Analysis is used in the valuation process.

In fact, there are a lot of companies that do not have even three-years of statements. In this case, the company should provide as much historical content as they can to the valuation analyst so that they can take whatever they can into account.

Furthermore, a market-based valuation method normally uses the multiples relative to the LTM (Last Twelve Months) operating results. Hence, in case a comparable public company analysis or the comparable transaction is being used, then the LTM Income statement is important.

If the 409A valuation is being performed with a recent capital raised as the benchmark for value, it is not important to give the LTM income statement. But again, as mentioned above, it is still important for the valuation analyst to obtain these documents so that they can learn more about the client. Hence, it should be provided as such to make the process easier.

#5 Future 3-5 years of financial forecast

It is also important for companies with revenue to share the future 3-5 years of financial forecast report with the valuation analyst. Their financial forecast is an estimate of the future financial results that the company would have.

Note: This is needed so that the 409A valuation analyst can easily perform the Discounted Cash Flow analysis. The asset’s value is the present value of the cash flow of the future that is adjusted for risks. In case a company has recently raised capital in exchange for equity, then the Discounted Cash Flow Analysis would not work and the future forecast would not be necessary.

In case there isn’t any recent equity financing round and the future results have a lot of uncertainty, the Discounted Cash Flow Analysis would not be used as the 409A valuation method. In fact, it is understood that the hardest thing for companies is to get an accurate future forecast.

#6 Breakdown for issued options and warrants, and future options in 1 year

Another one of the documents for a 409a valuation to provide the analyst with is the complete details of the company’s option ledger. This would include the details on the total number of outstanding stock options, the strike prices, and the grant dates.

Note: A cap table would do the work that is needed. But if you are able to offer a much more detailed report of everything, it would help the analyst understand things better.

Additionally, offer the analyst with the term sheets and agreements for any instruments convertible into equity. In case there has been any current transactions (in the LTM) in the company’s stock, you would have to give all the supporting information on those transactions as well.

This is not just for the rounds where equity capital was raised, but also for any other secondary transactions in the company’s equity.

You would also have to estimate the total number of stock options that you are expecting to issue in the next 12 months. This information has to be put in a document and shared with the 409A valuation analyst.

Note: This would be used as a part of the completed diluted share count according to the AICPA guidelines. Again, this is something that almost all the companies do not have available. But if you are able to offer this information, it would help a lot in determining the 409A valuation. You can offer the best estimate possible for this part. Also, do not forget to share the information about when and if you intend to raise equity in the near future.

#7 Any outstanding debt

The last thing that you would have to give is the document stating any debt that your company has. You would have to provide all the term sheets for this so that the key information can be analyzed by the 409A valuation analyst. Just to make it clear, outstanding debt is a tool for debt financing. It is the amount (or assets) that the company has to pay back, including interest for capital raised by the company.

Choosing a correct valuation date

You might remember coming across the part in the beginning of the article where you needed to select a valuation date and share it with the analyst. Well, we would like to explain this part in detail to not confuse it with something else. Basically, the valuation date is not the same as the delivery date of the valuation report.

Then, what is the valuation date about? Well, the IRS needs every company to choose a particular date on when the company would be valued. For instance, a particular day like the 3rd of July this year. That might sound like something strange, but this is a practice that is common with the IRS and for many tax valuations. It is called the point-in-time valuation estimate.

For you to comply with the 409A rule in the IRS, you would need the point-in-time valuation estimate. In short, you and your valuation partner would have to agree on a specific date for when the value would be assigned to your company.

Still not sure why should you care?

Well, 409A valuations have a limited period of validity, which is mostly just 12 months. And by choosing the date, you are giving a starting date of when the period of validity begins for the 409A valuations. This is one reason why you would want to pick up a date as late as you can without causing any trouble in the stock issuing plans that you have.

Moreover, there are many additional factors that can also affect the valuation date. For instance, in case you are raising money, it is usually beneficial to get the 409A valuation before the term sheet is signed. It would help you get the lowest strike price possible. So, you can pick up any date that is around the time you reach out to a valuation firm.

Frequently Asked Questions

To understand more about what documents are required for a 409A valuation and other important information, here are some frequently asked questions that we have prepared and answered for you.

What company documents may you require to get a 409a valuation?

The process of 409 valuations usually requires an evaluation of a company’s financial statements, which includes gathering information about income statements, cash flows, balance sheets for the last 5 years, trial balance up until the valuation date, and a cap table. These financial statements can be either audited or reviewed, depending on the level of assurance required by the company.

Further, you may also need to obtain the latest copy of the certificate of incorporation (Articles of Incorporation) and the Company’s bylaws. While the financial forecast report for up to 5 years, along with the company’s option ledger, should be provided to the analyst.

How long does it take to get a 409A valuation?

If all the required documents are in place, it usually takes 2-3 weeks in order to get the final draft of the valuation approved by the Board of Directors. However, for mature companies where the auditor is assigned to have the financial statements reviewed or audited, it normally takes longer.

Basically, for data collection and execution, it takes two weeks, and for further approval and formal submission, the process can take another week. As such, the complete process might take up to 3 weeks.

Does a SAFE affect 409A?

Simple Agreement for Future Equity, or SAFE, is indeed a kind of security, but the Internal Revenue Service (IRS) lacks a clear definition for this. As per IRS, it is unclear whether the issuance of SAFE can affect the 409A valuation. Thus, it is advisable to get in touch with our experts to get the right guidance, support, and detailed insights.


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