409A VALUATION THE IMPENDING CRISIS

A 409A Valuation determines the fair market value of a company’s common stock. It is used for pricing employee stock options and other equity-based compensation plans. The competency of this valuation is crucial for many reasons:

IRS Compliance - if the valuation is found inaccurate, employees holding options may face immediate taxation, interest charges, and a 20% penalty.

Enhances Investor Confidence – improper values raise red flags in a funding round.

M&A – in the event of a merger or acquisition the supportable value increases the likelihood of a reasonable negotiation and deal closing.

Financial Integrity – supportable opinions reduce the risk of IRS audits, legal disputes, and penalties.

Too often the company wants a quick and easy solution, usually in the form of One-Click valuations. These low-cost alternatives are based on algorithms and metrics, which ignore factors such as recent growth initiatives, value of IP; depth of management, competitive position in the industry, market comparables, and other macro conditions.

The potential crisis is that too many “so-called valuations” are not at all supportable. These cheap solutions are all too common. However, if and when the IRS puts these audits on its radar, the house of cards will crumble.