Startups often need to offer equity incentives to attract and retain top talent. However, in order to comply with IRS rules, startups must issue equity incentive grants at no less than fair market value. This is where a 409A fair market value valuation comes in.
A 409A fair market value valuation is an independent assessment of the value of a private company’s common stock. This valuation is performed by a qualified third-party appraiser and is used to determine the strike price of stock options and the purchase price of restricted stock grants.
Fair Market Value: “The price that a seller is willing to accept and the buyer is willing to pay on the open market and in an arm’s length transaction.”
Internal Revenue Service, Revenue Ruling 59-60
Fair Market Value (FMV) is a key concept for startups looking to offer equity incentives to their employees. FMV is defined as the price of an asset that would sell in a fair, open, and competitive market, where both buyer and seller have all relevant information and are acting in their best interests. FMV is crucial in the context of non-qualified deferred compensation plans, such as stock option plans, regulated by IRC Section 409A (IRC 409A) of the U.S. tax code.
There are several reasons why 409A fair market value valuations are important for startups:
- Compliance with IRS rules: As mentioned above, startups must issue equity incentive grants at no less than fair market value in order to comply with IRS rules. Failure to do so can result in significant tax penalties for the company and its employees.
- Attracting and retaining top talent: Top talent is in high demand, and startups often need to offer equity incentives in order to attract and retain the best employees. A 409A valuation report can help startups ensure that they are offering their employees fair and competitive equity packages.
- Planning for future fundraising events: Startups that are planning to raise capital in the future should also consider getting a 409A fair market value valuation. This will help them to accurately value their company and to negotiate favorable terms with investors.
Eton Venture Services is a leading provider of 409A fair market value valuation services. We have a team of experienced and qualified appraisers who can help you to get a fair and accurate valuation of your company. We also offer a variety of other valuation services, such as post-money valuations and exit valuations.
If you are a startup founder or CEO, we encourage you to contact Eton Venture Services today to learn more about our 409A fair market value valuation services. We can help you to ensure that you are complying with IRS rules, attracting and retaining top talent, and planning for future fundraising events.
Here are some additional things to keep in mind about 409A fair market value valuations:
- 409A Valuation methods: There are a variety of different methods that can be used to value a private company. The most common methods include the discounted cash flow (DCF) method, the comparable companies method, and the asset-based method. The best method to use will depend on the specific facts and circumstances of the company.
- 409A Valuation discounts: When valuing a private company, it is important to consider certain valuation discounts. These discounts account for the fact that private company stock is less liquid and less marketable than publicly traded stock. Common valuation discounts include the minority interest discount and the lack of marketability discount.
- 409A Valuation reports: Once a 409A fair market value valuation has been completed, the appraiser will issue a valuation report. This report should include a detailed explanation of the valuation methodology used and the valuation conclusions reached.
If you have any questions about 409A fair market value valuations, please do not hesitate to contact Eton Venture Services. We would be happy to answer your questions and help you to get the valuation you need.
Eton was founded by veteran Silicon Valley lawyers and include a team of CFAs who were trained by the Big Four. Our singular focus on valuation, lack of conflicts, and thousands of valuations under our belt, make us the valuation provider of choice for private companies, venture capital firms, and their advisors. Armed with our independent valuations reports, your company can issue stock options in compliance with 409A to build a top-notch team that’s ready to accelerate the growth of your startup. Join the industry leaders who have already experienced the advantages of Eton’s exceptional client service and valuation expertise. Let us navigate you through the complexities of 409A. Contact Eton Venture Services today.