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When do you take the 409a result to the board?

The 409a process is long and involves many people and moving parts and the board really, really cares about the outcome for many reasons. When is the right time to discuss the outcome with the board? Is it at the board meeting where the valuation is to be presented, or before?

Answers

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

Yes, the 409a is a big deal to the board. They view it not as an accounting exercise, but as something that will greatly impact their ability to hire talent (due to its impact on the cost of exercising shares for new employees) and for what it says to existing employees and prospective investors about the value of a company and in which direction it is heading.

I find that it's helpful to discuss the valuation exercise with the board early (offline), prior to engaging a valuation firm, in order to see what their perspective is on the valuation. Based on their feelings about company and broader market movements you may have some board members who think the value should go up, others who think it should stay steady or others who think it should drop. You will want to manage expectations along the way with all members.

Once the draft valuation is completed you should review it for reasonableness before accepting it. The valuation firms do many of these every month (sometimes every week) and they know a lot less about your company and its future than you do. It is fair to go back to the valuation firm with feedback if you think they are off the mark or if some of the analysis simply does not make sense to you.

Once you think you have it in a good place, I would put it past key board members for their reaction. If they think the valuation is way out of whack they may have a point. The fact is, most people who sit on multiple boards will see a lot of 409a valuations and they will probably have more experience with the process than you. They also look at and value more companies than you do and consequently may have valuable input as to the inputs and outputs of a valuation exercise. By going to them early you avoid surprises at the board meeting and you may get solid input as to changes that rightfully should be made to a valuation which will result in a better outcome insofar as it more accurately reflects the current value of your company.

Only after you are all square with the valuation and the board (and yourself) should you present the final result to the board for their vote.

Topic Expert
Jeff Chase
Title: Advisory CFO
Company: Hazelcast, Juicebox Energy, and Social I..
(Advisory CFO, Hazelcast, Juicebox Energy, and Social Inertia ) |

I would only add, that before going to the board with it make sure you get it signed off with your auditors first, or at least to a point where you don't later have to come back and have the fair value price raised because some partner or appraisal arm of the Big 4 didn't agree with your valuation. I had a big 4 partner that took an expensive valuation study, and used the old fashioned ratioing of preferred to common to claim the study was invalid, after my expert and I spent hours arguing with their appraisal expert. Amazing - it ended up with a compromise, based on not the study but this partner's opinion.../jeff

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

That sort of thing drives the VCs nuts. They don't like the tail (the auditor) wagging the dog (the company) on this issue. 409a is on very shaky ground with VCs and many others due to its highly subjective nature and large impact. I've had board members tell me to tell the auditors to "take a hike, this is a tax issue." Of course when you have linkage between 409a and 123r it becomes an audit issue. But the fact is that the auditors know less about your company than you do and less about valuations than the valuation companies do (typically, not always) so what you sometimes get is an auditor being difficult just to show they can be difficult or to win points (or so they think) for their firm, rather than someone who is adding real value to an earnest valuation discussion.

Topic Expert
Jeff Chase
Title: Advisory CFO
Company: Hazelcast, Juicebox Energy, and Social I..
(Advisory CFO, Hazelcast, Juicebox Energy, and Social Inertia ) |

Fully agree John. Accounting firms are also being driven off the scrutiny they're under - if the co was to IPO later, fair value discussions will get a spot light put on them so it's mostly covering themselves. They also rely naively on a position of "well, it can't be that low, or why are investors investing their money" - much to your point - not qualified comments in the face of weak projections, solid valuation study, etc.

Rajeev Seshadri
Title: CFO
Company:
(CFO, ) |

Valuations for a non-public entity are tricky, in that the purpose for the respective valuation studies often differs.

A propos to all the preceding comments, since a valuation is usually a non-recurring event, i.e. done infrequently, timely discussion or notification to the Board is good communications.

Accounting firm's perspective on valuations is usually process driven. So if you have a complete valuation study that you can sign off on, along with 3rd party validation, then your bases should be covered.

As comedic relief, I have a story of a company that bought key-man insurance and the broker put in a purchase price that was really high. Later one of the employees filed a lawsuit attempting to force a buyback at a price that would bankrupt the company!

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