What should you look for in a 409A valuation provider?
A popular method private companies use to attract talent is offering stock options. For an employee, stock options are a rare opportunity to acquire private equity and generate wealth. From the founder’s perspective, stock options incentivize employee performance by letting them take part in the company’s growth.
If you share the same optimism about stock options, you must understand the importance of hiring a competent 409A valuation provider .
The IRS requires private companies to hire an independent third party to conduct a 409A valuation to determine the company's stock's fair market value (FMV). The price at which your company's stocks will be offered to employees will be based on the FMV determined in the 409A valuation.
The choice of which 409A valuation provider to go with is very consequential. After all, it impacts your tax liability, regulatory compliance, and hiring costs.
To help you make this choice, we have compiled a list of things you should look for in a 409A valuation provider:
Expertise and experience
Determining the valuation of private companies is way more complex than doing so for listed companies. A 409A valuation provider works with a lot less data to assess companies with never-seen-before products. At the same time, 409A valuation providers must consider the tax outcomes of the valuations they set.
So, you will need a 409A valuation provider that has a team of qualified experts who have done valuations for various companies at different stages of their lifecycle.
Agility
In the early stages, when attracting the right talent is tied to your survival, it is crucial to get your 409A valuation done sooner rather than later. Stock options can be indispensable in attracting the right people, especially if your company is pre-revenue.
To issue stock options, you must get a 409A valuation every 12 months and after material events.
To ensure that your hiring plan gets executed with agility and without any hiccups, you need an agile 409A valuation provider.
A quality 409A valuation provider will tell you upfront the information they need and the time it will take to get back to you with an FMV.
Ability to scale up services
As your company grows, it will experience numerous material events. So, the frequency at which you need 409A valuations will also increase. If you hire a 409A valuation provider with a large, efficient team that understands your business, they can deliver on your needs as your company grows.
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If you have a complex product, you will be best served by a valuation company you have worked with since the early days. They will have the necessary business understanding and capacity to deliver audit-ready 409A valuations swiftly whenever the need arises.
Company-centric approach
A good valuation provider will have a discussion with you before setting out to assess the FMV. In this discussion, they will try to understand your company's needs and build a consensus on the valuation method to be used. This mitigates the possibility of errors.
An error in the 409A valuation might lead to follow-up 409A valuations. In some cases, errors might even incur costly penalties from the IRS. Either of the cases is a major hiccup for hiring plans and can prove costly.
Tax-related guidance
When getting a 409A valuation, one of your main concerns would be to minimize your tax liability. Needless to say, tax liabilities can stem from other equity-related decisions as well. Down the line, you might need assistance with other equity-related tasks that can have tax implications. These tasks include planning your equity structure and filing various forms, like the 83(b) election and Form 8594 .
So, in addition to expertise in valuation, you should also seek expertise in tax-related matters . You should check to see if the valuation provider you are considering has a dedicated team of tax professionals.
Wide range of valuation services
You may require valuation services for purposes other than issuing stock options to your employees. Company valuations can prove useful in:
So, you would be better off choosing a valuation provider who can handle the diverse valuation needs of private companies.
Eqvista's 409A valuation services
At Eqvista, we provide 409A valuation services for businesses at every funding stage, right from the seed funding stage. We pride ourselves on the swift delivery of valuations at affordable prices. We provide unlimited 409A valuations at fixed annual prices. We are also equipped to guide you in managing tax liabilities arising out of equity-related matters.
Having an experienced team of NACVA-certified valuation analysts has enabled us to serve more than 15,000 companies.