The Gray Areas of 409A Valuations

By Jeff Faust, Director of Valuation Services
ASL Valuation Services

Generally, most companies understand what a 409A Valuation is and why they need it, but questions commonly arise regarding the timing and subsequent updates of their 409A Valuation. Not all of these questions have clear cut answers and ASL prides itself in helping our clients navigate these “gray areas” of 409A Valuations.

409A Valuations – Frequently Asked Questions

Here are some commonly asked questions:

  • How early should a company get a 409A Valuation?
  • Can we still use a % of the preferred stock price for the common stock price?
  • What if I have granted options without a 409A Valuation?
  • Do we have to hire a third-party valuation firm to perform a 409A Valuation?
  • How long until my 409A Valuation expires?
  • What if we aren’t currently granting options?
  • What if my prior 409A Valuation has expired and I am not currently granting options?
  • What happens to the share price if a founder sells some of his/her common stock?
  • Can we fundraise with an expired 409A Valuation?
  • Do I need to show potential investors my 409A Valuation?
  • We are fundraising, but want to grant some options, what do we do?
  • What if we didn’t get around to granting options and now we have closed financing?
  • What happens when options are exercised after a 409A Valuation expires?
  • What if I had a 409A Valuation performed recently but just closed a financing round?
  • What are the significant events that trigger the requirement of a new 409A Valuation?

With 409A Valuations, timing is everything and planning ahead is critical. Waiting too long to get a 409A Valuation can mean that employees are receiving options that have already missed out on early increases in value. Completely ignoring 409A is worse and can lead to IRS challenges and potential tax penalties for your employees, auditor challenges or even the inability to sell the company.

If you would like to discuss these questions or any others that have come up while dealing with granting stock options or employee equity programs, please contact Jeff Faust, CVA, Director of Valuation Services at jfaust@aslcpa.com / 408-377-8700 x232.