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409a Valuation FAQ For Founders

Posted by Early Growth

November 30, 2017    |     3-minute read (586 words)

What is a 409A Valuation Report?

A 409A valuation is a formal report that documents the value of your company’s common stock for the purpose of granting stock options. When you grant stock options to your employees, you are giving them the option to buy equity in your company at the market value of the common stock (the “strike price”).

When you issue options to employees, the strike price (the price that you pay to exercise an option) must not be below the current value of common stock. If you offer options at a strike price that is below the current value of the common stock, you and your employees could incur severe tax penalties.

How long is it good for?

The valuation is valid for twelve months after the Valuation Date or until a material event impacts the value of the company. Any new rounds of funding (equity or debt), major long-term contracts, change in business model, or increased regulation within the industry can impact the valuation of the company depending on the circumstances. The company's position should be reviewed at each option grant, and this is something a valuation firm can help you to determine with a brief phone call.

When do you need a 409A Valuation?

How do you know if you’re ready? If you answer “yes” to any of the following questions, it’s time to contact Early Growth Financial Services for a 409a valuation:

– Are you trying to value the common stock of a company?

– Do you plan to issue stock options and set your strike price?

– Have you raised a new round of funding since your last grant date?

– Have you had a material event (e.g. coming from seed stage to series A)?

– Are you looking to sell IP from one company to another?

– Has it been 12 months since your last 409a?

Early Growth vs. Low Cost Valuations:

Cap table software companies who perform the 409A valuation in-house, rather than outsourcing to an independent third-party firm, do not provide safe harbor due to independence. For an independent valuation firm to maintain its “independence” they cannot provide you with any other services in addition to their valuation work. This is why EGFS partners with Economic Partners to provide 409A valuation services.

“I caution on low-cost valuations. I know we are not going to be the cheapest out there, but we produce a very high-quality 409a that is highly defensible in an audit. A low-quality (low cost) 409a is much more likely to fail an audit, which could result in you having to re-price options, grant make-up options, and even compensate employees for having to re-issue them new options at higher strike prices. This can be very costly in terms of both money and time. At a low cost, they cannot put in the same time and resources to produce a quality audit-proof product.” - Brian Young, CFO, EGFS.

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About Early Growth:

For over 10 years, Early Growth has provided early-stage companies CFO Consulting Services, Accounting for Startups, Taxes, and 409a Valuation. We saw a need in the marketplace for a service that would allow founders to still focus on business while building a healthy financial story. Our Outsourced CFO, Outsourced Accounting, and R&D Credits services have helped many companies grow.

Questions about your 409A valuation? Contact Early Growth Financial Services.

Follow us: @EarlyGrowthFS

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