Understanding 409a Valuations

A 409a valuation is crucial because it formally establishes the fair market value of your company’s shares. As long as it’s performed correctly, a 409a valuation can ensure you adhere to tax laws and help you avoid any unnecessary IRS audits that may lead to serious issues down the road. Arguably even more importantly, a 409a valuation gives your management team alternative methods for compensating key employees! By performing a 409a valuation and granting options, you can compensate hires without using up critical funds during the early stages of your company.

How to Get a 409a Valuation

If you’d like a 409a valuation, there are three options available to you. You can do it yourself, use a  special software, or hire a firm that specializes in valuation. If you’d like to ensure you perform a 409a valuation correctly, going the professional route is your best bet. What we often find is 409a valuations done by yourself to be valued too high. The challenge with this is limited value for the employees that receive options based on this valuation. Remember, this is alternative compensation, and giving them the most value possible will ensure commitment to you and your growing company. 

You’ll enjoy the peace of mind of a safe harbor protection, which means you won’t have the burden of proof during an IRS audit if your valuation is too low. You can expect a professional 409a valuation to take about a month. While the report may be completed in a few weeks, data collection and revisions will likely lengthen this process by a bit of time. 

Download our FREE 409a Template