What is the cost of a 409a Valuation?

Do you know what a piece of your company is worth? If your company is a public, then the value is set by the market. But in case it is a private firm, then it all depends on independent appraisers. That is where the IRC Section 409A valuations come into the picture. 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 determines the cost to purchase a share and is found by using one of the 409A valuation methods.

Why does my startup need 409a Valuation?

It was in 2005 when the IRS introduced Section 409A to prevent executives from taking advantage of equity loopholes. 409A basically creates a framework for private companies to follow when valuing private stock. This is done by an unaffiliated or independent party to ensure that the valuation offers the safe harbor status.

Startups must get a 409A valuation to comply with IRS regulations when issuing stock options or equity compensation. This helps avoid penalties and unfavorable tax treatment by ensuring that equity compensation is issued at fair market value.

• To determine the company’s common stock’s fair market value (FMV). As a private company, there is no public market to set the stock price, so an independent 409A valuation establishes the FMV.
• To make the strike price for stock options issued to employees. The strike price must be at least the FMV determined by the 409A valuation to provide favorable tax treatment.
• To avoid tax penalties and legal issues from overvaluing or undervaluing the common stock when issuing equity compensation.
• To provide a benchmark valuation for future financing rounds, exits, or other corporate transactions involving the company’s equity.

Now, since it was the IRS that incorporated this section into the IRC, it is important to follow it.  When your company does not follow the 409A rules and valuation methods, your equity is mispriced. And along with this, the IRS gets the right to assess penalties for not following the rules. These penalties are then paid by those who own the equity, which can be the shareholders and even the employees who have received equity compensation.

409a Valuation Cost

From the above, you now know that you need a 409A valuation of your company as early as possible, especially if you are about to issue stock options to justify the choice of the strike price. This is why private companies normally seek out from an independent valuation service firm before issuing their options.

409A valuation costs are typically between $2,000 and $5,000 for startups, with the exact price depending on the company’s stage and complexity:

• Seed-stage companies can expect to pay around $2,000 to $2,500 for a 409A valuation.
• Funding costs increase with each subsequent round:
  • Series A costs range from $2,500 to $3,000
  • Series B costs rang from $3,000 to $4,000
  • Series C costs rang from $3,500 to $5,000
• Expedited turnaround times (less than the standard 10-20 days) incur an additional fee.

409A Valuation Price Comparison

Eqvista provides 409A valuations at a price 30% lower compared to other providers while maintaining the high quality of the valuation report. This means you can receive a professional and accurate 409a valuation without paying the higher prices charged by other valuation providers.

Eqvista’s reasonable 409a pricing stems from the following reasons:

• Eqvista offers unlimited 409a valuations for 12 months at a fixed annual price, allowing companies to perform multiple valuations throughout the year without incurring additional costs for each valuation refresh.
• Our in-house team of NACVA-certified valuation analysts conducts valuations efficiently without relying on external vendors.
• Optimized 409A valuation process, enabling the completion of valuations cost-effectively within a short timeframe.
• We developed a platform and cap table software to handle client data and equity details, saving time and effort.
• Eqvista has gained expertise by conducting valuations for various companies in different sectors, allowing us to optimize the process through our experience.

Eqvista’s 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. For example, a closely held company with sales of $5 million, 50 staff, and no previous funding may be equivalent to a Series B. Tell our staff more information to get an accurate quotation.

For a startup in the earliest stages of development, this seems like a huge waste of money and time, which could be used to instead grow the business. So, if your company has no revenue, no assets, and no proven business model, should you pay someone to tell you what you already know – that your stock is worth so little?

Factors that determine 409a valuation cost

As mentioned above, Eqvista can help you with getting you the 409A valuation using one of the methods that best suits your company’s stage, situation and industry.

Here are some key factors that will determine the price of your 409a valuation.

#1 Stage of company (Seed, Series A, Series B, Series C)

Every stage of the company has a different number of shareholders, assets that the company holds, and overall value. Due to this, it is very important to look into the stage of the company before the cost of the 409A valuation is determined. A company begins with a seed funding round, which is the first funding round to help get on its feet.

After the seed funding comes in the Series A funding, which is the first Venture Capital (VC) funding that the company gets. Then comes the Series B funding round that takes the business to the next level of the expansion stage.Followed by this is the Series C funding round, which occurs to make the appealing to support a public offering or for an acquisition. 

Some companies stop at this stage, while some move to further stages like the Series D funding, Series E funding, Series F funding, Series G funding, private equity funding rounds, etc. And each round makes the company bigger, where different stocks and equity options come in question. Due to this, each stage has a different price and since the efforts and calculation process gets intensified as we move to the next stage, the 409A valuation costs also increase. 

#2 Size of company (revenue per year, total amount of assets)

Another factor that affects the 409A valuation cost is the size of the company. To put it in simpler words, the smaller the company is and the lesser the complexity in the operations is, the less expensive it is. And if it grows bigger, their operations eventually become more complex.

This tells the size of the company and it also impacts the cost of the valuation. So, as a company grows in size, the valuation process becomes tough and the 409A valuation costs increase. Keep in mind that this is just an idea on how this affects the cost. The actual costs can be determined only when the evaluator gets the financial statements of the company to see the revenue earned, the assets owned, and the operation process.

#3 Complexity of Share Structure

A simple share structure in a company is when there is only one kind of equity class and only common shares are issued. This is normally the case of  it has just incorporated and has only the founders and some employees. For instance, if the company wants to take up funding with just the founders and a few employees and doesn’t have a high value, that is when the company might issue convertible notes.

And as the company grows, they will be issuing warrants, employee options, preferred shares and so onone. This means that as the time passes, the share structure becomes more complex. So, with a complex share structure, it is tough to get the valuation done so easily. This complexity in the share structure may contribute to a higher 409a valuation cost.

#4 TURNAROUND TIME

Expedited turnaround times faster than the standard 10-20 days incur premium fees, which can add $1,000-$3,000 to the cost of rush jobs. Companies like Eqvista can offer a 409A valuation cost for expedited service in 3-5 days for $390.

#5 VALUATION PROVIDER

Larger firms charge around $10,000-$25,000, 409A valuation cost which is probably not affordable to small companies. Companies like Eqvista provide accurate and affordable valuations for both small and large companies. Eqvista also offers a freemium plan with many benefits, like a paid plan.

Methods for doing a 409a Valuation

With that said, you need to know that there are different ways to get your 409A valuation done. But keep in mind that it is always suggested to secure safe harbour status for your company, as it will save you a lot of time and effort later on.

The various 409A valuation methods include:

#1 Do it yourself

If you have read everything above and still feel that you can do the valuation by yourself, it’s important that you have the needed knowledge, experience, education, and training to perform a 409A valuation.

If you are experienced in the field of valuation, this method can help you save a lot of money to get done by yourself. You will also have much higher control over the valuation of the common stock of your company. But keep it in mind that if you make any mistake and there is an IRS audit, it may be more difficult to defend yourself.

Additionally, by doing it yourself, you would not get safe harbor protection. A company can get the safe harbor status if the 409A valuation is performed as per the IRS rules, which is typically done by a third-party professional.

#2 Use valuation software’s

The next 409A valuation method is to use valuation software. Now, there are two types of software applications that you will find online. One would be paid and the other free. While using free software may save you money, paid software usually offers a more accurate valuation.

You will again not get the safe harbor protection using this method. And in case the IRS comes to audit your company, the burden of proof would be on you. Moreover, not everyone can use the software. You may need to fit certain criteria for the inputs of the company data to make sense for the ultimate valuation. Therefore, this option may also not be the best choice.

#3 Get expert consulting from a valuation service provider

The last option would be to hire a professional valuation service provider. And the best way to see how much the 409A valuation would cost you based on your company, you can call them up and discuss the details. You even have different choices to choose from.

This option has the highest 409a valuation cost, but it would also get you the safe harbor status. You will not have the burden of proof when the IRS comes to audit. But ensure the valuation firm is experienced, knowledgeable, and provides reliable service. This outside 409a valuation would reduce your risks when it comes to safe harbour status and any possible penalties from the IRS later down the road.

409a valuation reports with EqvistaGET STARTED!

Eqvista offers 409a Valuation starting at $990

With all that said, Eqvista is a professional valuation service provider on the market. Our team at Eqvista believes in offering affordable and efficient solutions for companies managing their equity. Our 409A valuation costs begin at $990 and go up based on your company’s age, history, industry, and more.

Eqvista’s 409a Valuation Process

• Hand over your data (1-5 days): This will include your cap table, articles of incorporation, financial projections, term sheets, any past 409A reports, and other required documents.
• Provide quotation, sign engagement letter and settle fees (1-7 days): We discuss a price for the 409a valuation. Once agreed upon, we will send you an engagement letter outlining our 409a valuation services, and upon signing the letter and settlement of the fees, we can conduct the valuation.
• Run the report (10-20 days): We will conduct the valuation and may ask you some follow up questions if need be.
• Review first draft (varies)
• Revisions (1-3 days)
• Final report is delivered (1-10 days)

The price of getting your company valued would be entirely on the kind of company you have, its age, industry, and other factors. So, the best way to find out how much it would cost is by connecting with us so we can understand your company better.

With this we would be able to offer you our best price for your 409a valuation. We will always be ready to explain how our prices are set and open for the best way to handle your valuation. Eqvista also offers our cap table software for managing your equity. Our application is FREE to use (for small companies).

FAQs

Here are some commonly asked questions and their answers about the costs of 409A valuations.

How Much Is The 409a Valuation For Larger Companies?

For very large corporations, 409A valuation costs can exceed $10,000. Companies like Eqvista can customize the plan according to their size and budget.

What Free Resources Are Available To Help Companies Prepare For A 409a Valuation?

Several free resources are available to help companies prepare for a 409A valuation: IRS guidelines and publications, Online articles and guides, Sample valuation reports, Webinars and videos, Checklists, and templates.

The Lowest Possible Strike Price Is The Goal Of 409a?

The goal should not be the lowest strike price but the lowest defensible price that adheres to IRC 409A and can withstand IRS audits. Valuations that are too low raise red flags and may get rejected by the IRS.

How Does The Size Of A Startup’s Team Affect The Cost Of A 409a Valuation?

Team size is not mentioned as a direct cost determinant. However, it likely correlates with overall company size, stage, and complexity that drive costs.

Expert Tips for 409A Valuations

• The key factors driving 409A costs are the company’s funding stage, cap table complexity, and the turnaround time needed.
• Reputable independent valuation firms following IRS-approved methods are recommended to ensure compliance and establish a defensible safe harbor valuation.
• For 409A valuations, the primary cost drivers are a startup’s funding stage, size, cap table complexity, desired turnaround, choice of provider, and need for an audit-defensible valuation.

Maximizing Your Startup’s Value with Eqvista’s Cost-Effective Valuation

Use reputable independent valuation firms that follow IRS-approved methods to ensure compliance and establish safe harbor valuations. Manage and reduce costs by considering provider choice, timing, documentation, negotiation, staffing, and past report reuse.

If you’re looking for affordable valuations and need to maintain the quality of reports, Eqvista is the right place for you. Not only this but our valuations are always guided and monitored by experts. 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. If you’re interested in getting a 409A, please get in touch with us.