Why Fair Market Value Matters for Startups

Executive Summary: In order to attract and retain leading talent, early-stage venture-backed companies need to offer equity incentives in exchange for current lower cash compensation. For many companies, these incentives take the form of stock options grants. To comply with IRS rules, however, the company must issue equity incentive grants at no less than fair market value. Eton Venture Services is the valuation provider of choice for private companies, venture capital firms and their advisors on tax compliance fair market value assessments. We provide comprehensive, independent, audit-defensible valuation services and advice that help privately held firms fulfill their regulatory and tax compliance requirements.

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 Ruling59-60

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.


IRC 409a requires companies to issue deferred compensation at no less than FMV on the date the grant of deferred compensation is made by the company’s board of directors. In the context of a venture-backed startup, the deferred compensation being issued is often in the form of restricted stock grants or stock options.


IRC 409A valuations are particularly important for startups, as startups feel the need to issue attractively valued stock options as incentive to hire and retain the best talent. Most startups do not have the budget of an established company, which would allow them to offer competitive cash compensation. Instead, they rely considerably on stock options as an incentive to attract top talent in their industry.


An IRC 409A valuation performed by an independent third-party expert helps a company meet the IRS requirement to have formal documentation of the FMV of the company’s common stock on a given date. While the common stock of a publicly traded company is readily observable and one can easily assess the public company’s stock price on a given day, determining the value of the equity securities of a private company is a complex process and frequently involves an independent valuation expert produced a written and signed report with a detailed explanation of the methods utilized to estimate FMV. At Eton Venture Services, valuation is all we do. Our singular focus and lack of conflicts can give a company confidence that our valuations will withstand any challenge.


How can Eton help?


At Eton Venture Services, we were 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.

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