What Investors Expect: 409A + Stock Treatment
This is the final installment of our What Investors Expect series; I hope that the content we’ve provided has helped you to better interact with your new investors, and has set you on the path to success.
Firstly, what is a 409A valuation?
- A 409A valuation is an official report valuing the common stock of your company
Why do I need a 409 valuation?
- You need a 409A because the common stock you and your employees hold doesn’t have the same value as the Preferred shares your investors own
When do I need a 409A valuation?
- When your company first raises capital or when there is a “material change” in the business (new financing)
- When your business first issues stock options
- If it has been longer than 12 months since the last 409A valuation
How does the valuation process work?
- The valuation has to be done by a qualified individual, and you should hire an outside appraiser to avoid any problems with the IRS
- There are a few things to note which could impact the value of your common shares:
- Preferred stock features such as participation rights and dividends will affect the value of your common shares, with more investor-friendly features driving down the value of common stock
- Sale and transfer restrictions on common shares will also decrease their value, as there are fewer options for liquidity and lower odds of receiving an eventual payout
- Secondary market transactions, in which shares have traded in the secondary markets (ie a founder sells a block of shares separate from a fundraise), will affect how appraisers determine value
What happens if I don’t get a 409A valuation?
- Your employees will be subject to back taxes and a 20% penalty on any gains (applied annually)
If any of the topics covered seem like something your business needs help with feel free to reach out. As Nomad Financial works at on at-need basis, our team can perform the functions of these roles at a fraction of the cost. If you haven’t considered using a CFO consultant or external accountant before, I really think it’s something worth exploring, particularly if you are unsure whether you actually have the workload that requires the level of spend of a full-time hire a smart financial decision.