In order to recruit and keep talented staff, it has become more usual for startups to provide them with shares. Stock options are a powerful tool for recruiting and retaining top people, but how do companies decide what to pay for common stocks? Although it’s clearer for a public firm to figure out how many shares to give workers, a private company may need help to estimate its value.
Determining a company’s current and future earnings potential is called a business valuation. In other words, a business valuation establishes the fair market value of a company or the price at which a potential buyer can buy the firm.
If your business is a private entity, the only way to give options to workers without incurring taxes is via the 409A valuation. This article will help you understand 409a valuation, its importance for your business, and, most importantly, 409a valuation pricing. Read on to learn how Eqvista is one of the best 409a valuation providers to make an informed decision.
The Importance of 409A Valuations
It wasn’t until 2007 that the United States government started taxing stock option issuance. Stock options and other types of tax-deferred pay were taxed when the employee used the stock option to purchase common shares.
After the Enron accounting disaster in 2001, the government mandated that businesses accurately value stock options given to workers. The provision, established as the Internal Revenue Code (section 409A), requires that new companies routinely undertake audits to determine the shares’ worth offered by the employers as options.
Here’s what you need to know about the importance of a 409a valuation for your business.
What is a 409A valuation?
The 409A valuation is a third-party assessment of the FMV of a private company’s common shares. While the law doesn’t require 409A valuations, the IRS has effectively popularized them for private, venture-backed businesses. A 409A valuation allows a firm to demonstrate to the IRS that an independent party has determined the value of the company’s common stock. If they don’t, entrepreneurs are left to figure out the fair market value if the Internal Revenue Service ever inquires.
Generally, there are three phases to a 409A valuation.
- First stage – The value of the firm is calculated (sometimes known as the “enterprise value”).
- Second Stage – The FMV of the common stock is calculated by allocating the enterprise value across the different equity classes.
- Third Stage – Finally, a discount is applied to the FMV to account when the stock is not traded publicly.
Why is a 409A valuation important?
A 409A valuation is necessary to determine the value of the private firm’s common stock, as it is not traded on a public market. Although 409A may aid businesses in attracting and retaining talent, an updated internal value may indicate the firm actively seeks to expand its workforce.
The Internal Revenue Service has published rules stating that FMV must be determined using an appropriate method as of the date of issuance. One technique for a corporation to guarantee the value of its common stock is deemed reasonable by the IRS. It is to have an external party evaluate the FMV of the shares annually.
The Internal Revenue Service will recognize a company’s “safe harbor” if founded on a fair valuation technique. Investors in the private equity sector may learn a lot from seeing how a firm handles a 409A valuation. The firm and its workers are at risk if the owners do not take the necessary procedures to secure a safe harbor, resulting in tax implications on personnel options that might cause a labor shortage.
Sometimes, when a company’s value drops, it’s usually because business is slow or investors are worried about the economy. Companies may also use this lower 409A value to attract talent by offering staff inexpensive options with the prospect of selling out at a greater price upon the company’s ultimate departure.
Consequences of not having a 409a valuation
Employees may face significant financial repercussions if they fail to comply with Section 409A.
- Discrepancies in 409A valuations can result in wide-ranging effects.
- If the IRS determines that your 409A valuation doesn’t meet the safe harbor, all shares distributed to employees based on that fair market value (FMV) could be added to their gross income immediately, along with interest owed, for the current and previous taxable years.
- Stock options vested before the tax year in question might face a 20% penalty imposed by the Internal Revenue Service.
- An appraisal may need to be redone if it was not accepted initially or if errors were made.
How Eqvista Can Help with 409A Valuations?
The valuation process will get much more complicated as your business develops. There are many moving aspects in a valuation that you can easily overlook. It’s unlikely that you’ll be able to conduct a comprehensive valuation by yourself, especially one that can pass audit scrutiny and protect you from liability.
An expert service provider like Eqvista can be the ultimate solution. Our team has the credentials, expertise, and best practices to provide a reliable and unbiased report.
Read on to see how Eqvista can help you have a smooth valuation process.
Overview of the 409A valuation process and the steps involved
There is an association between where a firm is in its life cycle and the approaches used to value it. Earlier-stage firms are not likely to be making any revenue. They may still need to secure significant money or even a round driven by investment firms. In such cases, the appraisers may look into their stages and use an approach that suits their conditions and needs. There are three methodologies in which 409a valuations can be performed.
- Market-based approach– This approach lets you examine peer firms that either compete with your company or similar associations. It’s reasonable to infer that in fundraising events, investors paid the market price for their shares in exchange for preferred stock. Hence, adjustments must be performed in common and preferred stock to determine FMV.
- Income-based approach– When determining a company’s value, experts turn to the income method if the company generates sufficient profits. The net worth of a business is calculated by deducting its assets from its liabilities.
- Asset-based approach– This strategy is typical for startups that have not yet earned sufficient income to warrant raising capital. For this purpose, you must often determine a company’s worth by determining its net asset value.
The Steps Involved in 409a Valuation Process:
Eqvista employs a simple and direct 409A valuation procedure.
- Data Collection (1-3 days): Our team gathers all required data using a checklist to gain insight into your company.
- Report Preparation and Details (5-10 days): We start crafting the report after signing the engagement letter. If any additional details are needed from you, our team will be in touch to ensure the report’s accuracy.
- Draft Review and Revisions (1-3 days): The final days involve sharing the draft report with you. You and your company’s board review and approve it or request revisions which our team addresses.
- Finalized Report (1-2 days): Once revisions are completed, and the board approves the report, we finalize and deliver the 409A valuation report to you.
How does Eqvista simplify the 409A valuation process?
With Eqvista’s simplified valuation process, you can get your work done quickly and save much on your budget. The team of expert appraisers here will help you obtain accurate 409a valuation reports regardless of your company size. All you have to do is discuss with us, provide appropriate documents, and answer our questions.
Our skilled appraisers will create and draft your valuation reports based on the collective data. If you still worry about compliance issues, please be informed that our practices completely comply with safe harbor standards. The process is straightforward and adopts the best valuation practices.
Advantages of using Eqvista over traditional valuation providers
Compared to traditional service providers, the team at Eqvista can perform appraisals a great deal more quickly and at a much lower cost because of the cutting-edge technology and industry knowledge we have at our disposal. Not just that, here are a few advantages that make us stand out from our competitors.
- You can enjoy unlimited service for one year for as many 409A valuations as needed.
- Our NACVA-certified valuation team consists of highly-trained and experienced analysts available to assist you with every phase of the process.
- We have collaborated with a wide range of businesses in different fields.
- We offer cost-effective valuation reports of the highest quality.
Eqvista 409a Valuation Pricing – No Annual Commitments/Contracts
We provide reasonable pricing on our high-quality 409A valuation studies. A valuation is crucial for your business, but most 409a valuation costs are expensive. Because of this, we’ve made our services very reasonable to assist you with your valuation requirements.
Most crucially, with Eqvista, there is no such thing as an annual contract. Our service is at your disposal for as long as you need it. Our rates start at $990 and go up to $2,290, depending on the maturity of your business. Do you believe your organization has unique needs? Take advantage of our custom package, where you may modify the scope of our work and the price we estimate for it.
Hear what our Clients says?
What do you like best about the Eqvista 409a Valuation?
“Great team to work with. Went through the process step by step and revealed their logic at each phase in determining the value of the software.”
What do you dislike about the Eqvista 409a Valuation?
“Nil. All was fine. Filling in this survey, as the survey kept me coming back over and over to fill in more stuff! It would help if you lost a lot of folks from filling it”
What would you recommend to others considering Eqvista 409a Valuation?
“Have your details together as the more information you can provide to their valuation analyst, the better final product you will receive”
Ready to simplify your 409A valuation process? Try Eqvista today
Having a certified, independent valuation firm undertake the 409A assessment is the most usual and simplest technique to guarantee 409A safe harbor. To deliver the 409A safe harbor, your valuation provider must have the required qualifications, experience doing valuations, and substantial expertise in your field.
At Eqvista, 409A valuation services are fast, accurate, and affordable, and we can have them ready for an audit in no time. The company’s valuation will no longer be distracting as you can concentrate on running the firm. Also, our 409A valuation studies are of the highest quality, yet we keep our pricing low. Looking for an easy and accurate valuation service? Call us now!