What is a 409A Valuation? How do I get a 409a Appraisal?
Do I need a 409A Valuation?
If your private company is issuing stock options or any other form of deferred compensation to your employees, you must have an assessment of the fair market value of your business performed by a third-party valuation firm. This is to satisfy the Internal Revenue Code (IRC) Section 409A. This imposes severe penalties for compensation issued at any value other than the fair market value as of the grant date.
409A valuations are most performed to assist companies with setting the strike price for grants of employee stock options. The company must get a valuation update at least every 12 months or more frequently if significant changes occur in the business between grant dates (such as new rounds of financing).
IRC 409A valuations often require a contingent claims analysis to allocate the equity value among the various classes of a company’s securities. This is a requirement when the capital structure includes preferred stock or convertible instruments.
What does my Appraiser Need to Get Started on a 409a Valuation?
The following is a starting point for documents that fulfill IRC Section 409a Valuation requirements. Your appraiser may ask for additional documents and information as they work through the valuation.
409a Appraisal Checklist
- Articles of Incorporation, including Amended and Restated Articles of Incorporation. If you have made any changes to your articles of incorporation, such as adding classes of shares, the rights of each class should be spelled out here.
- Management biographies (can be a link to the relevant page of your company website)
- Year to date Income Statement for the period ending on the valuation date
- Balance Sheet as of the valuation date
- 5 years of financial statements (or since incorporation)
- 5 years of revenue, expense, and tax rate projections
- Detailed cap table, including a vesting schedule for options and/or warrants
- Debt agreements for all outstanding debt (including convertible debt)
In summary, you will need an IRC Section 409a Valuation if your company issues stock options or other forms of deferred compensation to your employees. A 409a valuation is a fair market value assessment of a company’s common stock done by an independent appraiser, such as Business Appraisal FL|GA. The valuation is for helping in setting the strike price for grants of employee stock options.