May 7, 2021
By definition, a 409A valuation determines the fair market value of a startup company’s stock. These valuations are usually conducted by an independent third party and are filed with the IRS to ensure a company’s compliance.
As an employee, you should be just as concerned with the results of a 409A valuation as your employer, especially if you are receiving or may one day receive a piece of startup company stock.
Here’s what you need to know:
Many startups choose to offer company stock as part of the employee compensation package. It’s their way to keep cash in the bank while also providing a much-appreciated perk to attract top talent.
Unlike publicly traded stocks, you can’t go online to see what your company stock is worth. That’s why startups are required to perform a 409A valuation every 12 months or after every round of funding. This allows you to see how much you should be paying for your company stock and ensure you’re getting a fair deal.
Otherwise, stocks that are incorrectly priced could mean you have to pay taxes on those options immediately, along with other penalties.
Independent evaluators review companies based on their market approach, cash flow, and tangible and intangible assets to determine a company’s stock price. It’s best that an independent party conducts the valuation because it puts the burden of proof on the IRS if a valuation might be considered too low.
In an ideal situation, the valuation will be rated low to allow you to purchase stock at a low price and generate long-term wealth as the company grows.
Your stock options are a major benefit of your job and count as deferred income. The lower the price of the stock you purchase, the faster you can start to see an ROI (buy low, sell high).
You deserve the right to know how your stock is priced and should be able to trust its accuracy. Feel free to reach out to YearEnd with your questions on 409A valuations.