Do you have the equity to offer your company’s shares? Are you aware of the value of your company’s shares? Are you doing a valuation?Before you offer your company’s equity, you need to conduct a 409a valuation. Continue reading to learn more about the various aspects of it. Lets read how 409a valuation important for business.
What’s a 409a valuation?
To determine the price of one share of company stock, the 409a valuation is an independent appraisal of company common stocks. The fair market value (FMV) is used to calculate the valuation. This framework is what all private companies must follow when valuing their private stock.
Is A 409a Valuation Considered a Safe Harbour?
Once a company has completed its valuation, it can submit the report to the IRS. If the IRS accepts the valuation, then the company is considered safe harbour. In the event of non-compliance, severe penalties may be imposed on the company.
This valuation allows us to calculate the value of the company. It is a simple guideline for companies on how to value their private stock.
When 409a valuation is Required?
You wouldn’t be able sell a chair if you don’t know its value. The same applies to companies that want equity. A 409a is extremely important. It is impossible to sell shares if you don’t know the value of each share.
What does a 409a appraisal cost?
Cost of a 409a valuation will vary depending on who you hire. A rough estimate of the cost would be between $1200 and $5000.
What’s the validity of a 409a appraisal?
The 409a valuation will be valid for 12 months or until a significant event occurs, whichever comes first. This could be a new funding round or acquisition by another company, a change in business model, or any other event that brings about significant changes in the company.
How to do a 409a valuation?
Any of the three options listed here can be used to value a company. Startup incubator is a great resource for helping companies to value their business or getting them in touch with the right organizations.
- You Can Do It Yourself –
You can also do the 409a appraisal on your own. This option has its limitations. While you may save money, you won’t be eligible for safe harbor.
- How To Use It –
This option is just like the other one, as you are responsible for proving that your valuation is correct. There are many opportunities to make mistakes. This method should only be used if you are an expert in the subject.
- Hire a Firm to Do It for You –
Although this is the most costly option, you’ll still have to pay an appraiser for the valuation. However, it’s the best option. This option is the most affordable, since you don’t have to prove that your valuation is accurate. You must make sure the appraiser or independent firm you choose is well-respected and qualified. This will make it easier to get a 409a secure harbor. You have a variety of firms you can approach to get your valuation, including Aranca, Preferred Return and Andersen.
What documents are required to make a 409a appraisal?
You will need certain documents and information to complete a 409a appraisal. These documents and information are:
- Article of incorporation
- Cap Table
- If applicable, Previous 409a Valuation
- Your Industry
- Income Statement
- Balance Sheet
- Statement on Cash Flow
The entire valuation can take up to three weeks. if you have all the necessary documents the process can be completed much faster.
What are 409a Penalties?
Penalties can be imposed if the valuation is not done in accordance with the 409a valuation regulations. The penalty will be borne by shareholders and employees. The IRS can levy an additional 20% tax on deferred compensation. Other severe penalties may be taken in the event of non-compliance.
Conclusion
All rules and regulations are essential for a successful start-up/business. It is a must to conduct a 409a appraisal if you are looking to grow your business. Keep in mind all of the important aspects discussed above.
