Thelander PC Digest: October 2024
What is a 409A valuation?
Welcome to this special edition of the Private Company Digest. This month, we’re joined by Scalar, a leader in business valuations, renowned for their extensive experience across over 25,000 valuations for diverse purposes including 409A, executive compensation, and more. Scalar’s insights will guide us through the intricacies of 409A valuations, a critical element for private companies managing equity distributions and compensation structures.
What is a 409A valuation?
A 409A valuation determines the fair market value of a private company’s stock. It’s essential for setting the strike price of employee stock options. The name “409A” comes from the section of the U.S. tax code that requires this valuation to ensure the option grant is fair, avoiding potential tax problems for both the company and its employees.
Why do private companies need a valuation?
Private companies need a 409A valuation to comply with tax laws and avoid penalties. It helps ensure that the strike price for stock options is set fairly. If the strike price is too low, it could lead to heavy taxes and penalties in the event of an IRS examination.
How do 409A valuations affect compensation?
The price set by the 409A valuation affects how much employees could earn from their stock options. For example, if employees receive options at a low strike price and the company grows significantly, they could make a substantial profit if they sell those shares upon an IPO or an acquisition.
How are private companies valued?
Private companies can be valued in different ways, often using methods that compare the company to similar companies, estimating how much cash flow the company will make in the future, or looking at what it would cost to recreate the company’s unique assets.
What should I pay attention to in my valuation?
It’s important to ensure the valuation reflects your company’s fair market value, comparing it with similar companies and ensuring the financial projections are realistic. Also, check that the details about your company’s structure and financial situation in the valuation report are accurate.
When should I get a valuation?
Typically, it’s done annually or after any major event that could significantly change the company’s value, such as receiving a large investment, gaining or losing a major customer, or major market changes.
The Bottom Line: The role of 409A valuations is important in understanding your compensation – as well as making sure you are using the right data source. Thelander exclusively covers the unique compensation needs of privately held companies across all stages of financing and industries. Our platform provides thousands of the world’s top private companies with comprehensive cash and equity data to ensure their current and future compensation structures are competitive and holistic. Connect with us today to leverage our elite consulting services and real-time data to win the compensation game.
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