Is 409A Valuation Mandatory?

A 409A valuation is crucial for private companies in 2024 to ensure fair practices, comply with tax laws, and foster sustainable growth by accurately valuing their common stock. Many founders question the need for a 409A valuation, weighing its importance against startup costs and efforts. 

However, opting for a valuation more than once a year can bring unexpected advantages. It helps keep the company on the right side of tax laws, gives current financial insights for decision-making, and shields employees from tax issues down the line. In this article, we will answer all your doubts about the 409a valuation, from “How long is a 409a valuation good for to When it is required?”

409a valuation

While the IRS requires 409A valuations for tax compliance, the specific circumstances of a company, such as its stage, financial health, and plans for stock option grants, can influence when 409a valuation is required and how often you need it.

What is a 409a valuation?

A 409A valuation appraises a private company’s common stock’s fair market value (FMV). This type of valuation determines the cost to purchase a share for setting the price of company stock options. 

The Internal Revenue Code Section 409A, established to prevent abuses in deferred compensation, mandates these valuations. Its primary purpose is to ensure that stock options and other deferred compensation are issued at a price reflecting their true value. By doing this, companies can avoid significant employee tax penalties and ensure compliance with federal tax laws.

Eqvista’s 409A valuation is recognized nationally for offering defensible valuations to companies of all sizes, industries, and stages. We are NACVA certified and dedicated to handling each case. Eqvista’s 409A valuation promises quality and accuracy.

Download Eqvista’s 409A Valuation Brochure here.

Why is a 409a valuation mandatory?

A 409A valuation is essential for ensuring fairness and compliance in employee compensation through equity. But you should secure it for your company for a few more reasons.

• Tax Compliance: The core reason for a 409A valuation is to comply with the Internal Revenue Code Section 409A.  This law regulates the taxation of deferred compensation, like stock options. It mandates an accurate valuation of the company’s stock to determine the fair market value (FMV) of equity granted to employees. Without compliance, companies and employees face significant tax consequences.
• Setting Fair Market Value for Stock Options: Establishing the FMV of stock options is critical. It ensures that employees pay a fair price for the options they receive, reflecting the company’s actual worth at the time of the option grant. You must perform this valuation as a formality and a necessary step to base equity compensation on a realistic assessment of the company’s value.
• Avoiding Tax Penalties: The consequences of non-compliance with 409A are steep, including immediate taxation of deferred compensation, additional 20% federal taxes, and potential interest and penalties. A proper 409A valuation shields the company and its employees from these penalties by ensuring that stock options are at or above FMV.
• Deferred Compensation Timing Rules: Section 409A imposes strict rules on the timing of deferrals and distributions of compensation. A 409A valuation helps companies set up their compensation plans to adhere to these timing rules, avoiding the adverse tax implications of non-compliance.
• Protecting Employees and Stakeholders: Beyond compliance and financial implications, a 409A valuation plays a vital role in protecting the interests of employees and stakeholders. The company grants stock options at a fair valuation to protect employees from potential financial risks associated with overvalued stock options.

How often do you need a 409a valuation? 

You need to get a 409A valuation regularly to stay compliant and ensure your stock options have accurate prices. Here’s why and when is 409a valuation required:

• Annual Basis: It’s good to have a valuation done every year. This yearly check-up keeps your company in line with IRS requirements and reflects any changes in the company’s financial health or market position.
• Triggering Events: If your company goes through significant events, like raising a new round of funding, experiencing a substantial change in revenue, or launching a new product, these can all change your company’s valuation. After such events, it’s wise to update your 409A valuation to keep everything up-to-date.
• Material Changes in Business: Big shifts in your business, such as acquiring another company, entering new markets, or significant shifts in your business model, require a fresh look at your valuation. These material changes could significantly impact your company’s worth, making a new 409A valuation necessary.
• Equity Grants or Stock Options: Planning to issue new stock options or equity grants? It’s essential to have a current 409A valuation in hand. The correct stock option pricing protects the company and employees from potential tax issues.
• IRS Compliance: Staying compliant with the IRS is a mandatory deal. Regular 409A valuations ensure your company adheres to deferred compensation regulations, avoiding hefty penalties and taxes for non-compliance.

Eqvista’s 409A valuation services are cost-effective, accurate, and audit-ready, allowing you to focus on your business instead of worrying about the company’s valuation.

How can you get a 409a valuation?

Getting a valuation might seem daunting, but it’s straightforward, especially with services like Eqvista’s 409A Valuation.  Eqvista stands out as a reliable choice, offering expertise in this area with a track record of helping companies understand the complexities of valuation.

• Step 1 – Gather Necessary Documents: You’ll need to provide detailed information about your company, including financial statements, business plans, information on previous equity grants, and any other data that reflects your company’s financial health and prospects.
• Step 2- Understand Your Company’s Stage: The stage of your company – whether you’re a startup just kicking off, in the middle of rapid growth, or more established – affects the valuation. Eqvista’s 409A valuation tailors the valuation process to your company’s specific stage, ensuring accuracy.
• Step 3 – Go Through the Valuation Process: Eqvista’s 409A Valuation process involves a deep dive into your company’s financials, market position, and prospects. We use robust methodologies to calculate the fair market value of your company’s stock.
• Step 4 – Review and Implement the Valuation: Once Eqvista’s 409A valuation report is shared , review it carefully. This valuation will guide the pricing of your stock options and other equity-based compensation, ensuring fairness.
• Step 5 – Regular Updates: You might be wondering, “How long is a valuation good for? Remember, regular updates are necessary, especially if your company goes through significant changes. Eqvista’s 409A valuations can help keep your valuations current, ensuring ongoing compliance with IRS regulations.

How can Eqvista help to get your 409a valuation?

Eqvista’s 409A valuation reports are comprehensive and  tailored to companies’ needs  at every funding stage, ensuring compliance with federal tax codes and offering safe harbor status to avoid IRS audits. Upon approval of the draft, you’ll receive a complete, audit-ready 409A valuation report. To ensure audit accuracy and defensibility, these reports are detailed, often exceeding 50 pages​​.

Eqvista’s 409A  valuation services are recognized for reliability and supported by a team of NACVA-certified valuation analysts who use widely accepted valuation practices. We manage all equity management and valuations in one place, offering state-of-the-art cap table software alongside the valuation services​​.

Eqvista’s 409A valuation is flexible and accessible, offering unlimited valuations for 12 months, with pricing tiers based on your company’s funding stage, starting at $990/year for startups. Eqvista’s 409A valuation also provides expedited services for those needing quicker turnaround times​​.

Get your 409a Valuations Done from Eqvista!

A 409A valuation is not just for compliance. It’s a fundamental necessity for any private company offering equity as part of its compensation plan. It becomes particularly critical during significant company milestones such as fundraising rounds and major changes in business operations or before issuing stock options to new employees.

If you’re at the stage where a valuation is on the horizon, don’t go it alone. Reach out to Eqvista’s 409A Valuation service, where a team of valuation experts is ready to guide you through every step of the process, ensuring that your company’s valuation is handled efficiently and accurately. Remember, staying compliant protects your business and reinforces your employees’ and investors’ trust. Contact Eqvista today to get started.