Some Important Things You May Not Be Aware About 409A Valuation

1. Some Important Things You May Not Be Aware About 409A Valuation Have you just started a new business and planning offer stock options to your employees? If so, getting a 409A valuation is the most fundamental step towards it. If an employee chooses a stock option, there has to be a strike price for that. And, 409A valuation methods helps the new startups by providing an assessment of the fair market value of the company's common stock. It is very easy to examine the specific prices with publicly traded stocks. However, when it comes to the stock prices any private company, valuation is required to know the worth of its common stocks. 409A valuation name is originated from the IRS Section 409A. Additionally, as per the American Jobs Creation Act of the year 2004, it has been stated that this section applies to compensation that is earned in one year buy the workers. But, it is paid only in the future years and called as a nonqualified deferred compensation. Moreover, it is different in the form of elective deferrals to qualified 401(k) plan, 403(b) or 457(b) plan as compared to deferred compensation. And, Stock options are basically considered as the deferred compensations.

2. What is 409A Valuation? If we summarize the definition of 409A Valuation, we can say that it determines a price at which the employees of your company can buy equity ( strike price). This strike price is supposed to be above or at fair market value. Why & When do you require a409A Valuation? If you have just started a startup, you must be aware of the fact that when & why should you need a 409A Valuation. By law, you require a 409A Valuation to get done to ensure that your company is in compliance. It plays a vital role in avoiding consequences like significant IRS penalties & lost compensations. You can plan to get a 409A valuation whenever your company tends to close a new funding round. Or you can get it done after every 12 months if you wish to offer the common stock options to your employees. What are the 409A Valuation Methods & Approaches? Since 409A Valuation is an appraisal, firms have determined various approaches for appraising a fair market value.

3. ❖Income approach: With this approach, we can get the projections for the next 5 years by doing "free cash flow analysis" of any company. ❖Market approach: This is another approach by which we analyze comparable public & private transactions and companies. ❖Asset approach: With this approach, we analyze all the intangible as well as tangible assets of a company. There are preferably three 409A Valuation Methods. ❖Use software: It is considered to be one of the riskiest 409A Valuation Methods. However, if your startup falls under the category of the early-stage startups, you can opt this method. To make it simpler, you can use a software for 409A Valuation, if you're not either within 90 days to acquisition or 180 days to an IPO. Either if, in assets, you have less than $100,000 or you haven't raised $500,000 yet. ❖Do it yourself : It is another riskiest options or 409A Valuation Methodssince it does not have "safe harbor protection." Because of which, there are chances of getting IRS involved. Further, you will have to prove the authentication of the valuation done by you, at any time of period. Although by doing 409A Valuation on your own, you can save your money, the chances of doing it wrongly also increase. Therefore, it is recommended either to have the expertise in the 409A Valuation techniques or to hire a professional. ❖Hire a firm: As compared to the other two 409A Valuation Methods, this is considered to be the safest method. By hiring a third party or a professional for getting 409A Valuation done, you would get safe harbor protection. You need to figure out the right option or firm for you and earn a peace of mind. Because now, IRS itself, owns the burden of proof. Take Away Since by paying for a 409A Valuation you get safe harbor protection, it is the least risky option or one of the best 409A Valuation Methods. If you are also looking for an experienced independent firm that has the right skills & engrossed knowledge, head toward “HP Accounting.” We are the leading CPA and business valuation firm supporting our clients’ in compliance with all the IRS rules & regulations. Hire us as your Valuation experts and protect your company and employees. To know more about 409A Valuation Contact Us Now!