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 in order to satisfy IRC Section 409A, which imposes severe penalties for compensation which is issued at any value other than the fair market value as of the grant date.

409A valuations are most commonly performed to assist companies with setting the strike price for grants of employee stock options. The valuation needs to be updated at least every 12 months or more frequently if significant changes occur in the business between grant dates (such as new rounds of financing).

409A valuations often require use of a contingent claims analysis to allocate the equity value among the various classes of a company’s securities. This is generally required when the capital structure includes preferred stock or convertible instruments.

What does my appraiser need to get started?

The following is a starting point for documents needed in order to fulfill 409A valuation requirements. Your appraiser may ask for additional documents and information as they work through the valuation.

  • 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)

BEAR, founded in 1986, is a business valuation firm working through a nationwide network of valuation experts, CPAs, business brokers, and consultants. Among our staff we have the major valuation credentials, including ASA, CPA/ABV, CVA, CFA, and MVS.