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409a valuations

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 I am curious about how various VC backed companies are handling the 409a issue.  The IRS requires that each company have a valuation performed to support the price of employee stock options.  This may make a lot of sense for public companies but makes little sense for early stage (even pre-revenue) companies.  This is a costly, and/or time consuming process that adds little value to the company (or even to the IRS since these companies aren't paying taxes and are years from the employee paying taxes on any stock gains.)  But, that ship has sailed... This is the requirement.  I am wondering how other companies are handling this?  Are you spending several thousand dollars to have a 409a valuation done?  Or, are you taking the risk?


Topic Expert
John Kogan
Title: CEO/CFO
Company: Proformative, Inc.
(CEO/CFO, Proformative, Inc.) |


I have been CFO of a couple of companies in the post-409a era and the board looked straight at me each time. Well, they glanced at outside counsel who told them to make sure it happened and that it is well-documented, etc., but after that they just expect CFOs to run it.

I find most are doing quick and inexpensive (if you call $7,500 inexpensive - but it's less than it used to be) third party valuations b/c who wants to be solely responsible when the IRS and employees are concerned?

There are reasonably well established procedures and standards for doing the valuation and any decent firm will do them (I'll put in a plug for Teknos Associates here - I used them at my last company and they were inexpensive and very good). What you will find are valuations based on comps/multiples and DCF are the norm - often using a combination.

Interestingly, the valuation companies do many of these a week and they lean heavily on the CFO for raw materials and guidance. I find that leaves the CFO in the drivers seat to some extent b/c they often provide the very model that the valuation firm will use to run their analysis. The firms are also open to discussion when it comes to all of the discounts applied to the DCF and the companies included in the multiples discussion.

What all of that means is that the CFO can effect the valuation greatly. And what you should do up front, before even engaging the provider, is to get a feel for what the board expects the outcome to be. If they think (based on whatever they're thinking) that the valuation should be $.08/share and your valuation providers comes up with $1.35, you're in trouble. Get ahead of that and bring the valuations together (metaphorically speaking). This will help you reduce surprises and rework.

Jeff Taylor
Title: CFO
Company: Communications Co.
(CFO, Communications Co.) |

I generally agree with John. First, 409a is not an option and the board just asks the CFO to "take care of it". Second, I certainly don't want the liability down the road when there are so many practitioners around and the process is so well established. Yes it's annoying to have to do it in the first place because the entire exercise seems futile (as you note in your second post), but what can you do...

That said, there are better and worse valuation providers out there so make sure you find one with a good rep (just ask the group on Proformative - lots of experience on this board).

Lisa Cobb
Title: CFO
Company: HealthSmart Holdings
(CFO, HealthSmart Holdings) |

Should definitely have the work done. The silver lining right now at least is that many valuations firms are looking for work. I recently received a quote from the firm that we historically had used and thought it was too high. Went out to bid with 3 firms and a very tight turn around. Cut the cost by more than half.

Rajeev Seshadri
Title: CFO
(CFO, ) |

Agree with the emerging consensus - i.e. use a 3rd party valuation firm to validate your findings. One method would be to do the valuation yourself and then use the valuation firm to validate your process and assumptions.

An interesting thought is that if the Company is out seeking new funds and has a termsheet out with valuation figures (or has recently received funds at a high valuation), that factor could season the stew.

Topic Expert
Marc Linden
Title: CFO
Company: Intacct
(CFO, Intacct) |

It is absolutely worth it to spend the money and take the time to do regular (at least annual) 409a valuations. The IRS has established safe haven status if you price options based on the valuation. This avoids any cheap stock issues down the road which can be significant issues in an IPO or M&A transaction.


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