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Five Key Things to Know About 409A Valuation

It is always recommended to get 409A valuation done by a third-party appraiser who has the relevant expertise. A professional team will determine the FMV by examining the company's financial statements, cash flows, assets, etc. It may also conduct comparisons against companies of similar size in the same kind of industry.<br>https://www.aranca.com/409a-faqs.php<br><br>409A Valuation<br><br>

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Five Key Things to Know About 409A Valuation

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  1. Five Key Things to Know About 409A Valuation As per its technical definition, “section 409A valuation is an independent appraisal of the fair market value (FMV) of a private company's common stock by a third-party appraiser”. 409A valuation is a critical process that should be undertaken by privately held companies, especially startups that want to compensate their employees via stock options. 409A valuation may be a complex process for some companies. The five key things to know about it are: 1. Who should do it? Any privately held company that plans to issue stock option needs to undertake 409A valuation. It is usually done after a new funding round by the company. 2. What is the data required to do a 409A valuation? The main information are: ● Certificate of incorporation ● Capitalization table of the company ● Financial statements – historical and forecasted ● Business plan ● Details of recent transactions and stock purchase agreement 3. What is the safe harbor method? Employed in the final section of 409A valuation, it entails valuing stock options. The IRS will presume it to be correct and has the burden to prove that the company was grossly unreasonable in determining the FMV of the security if it wants to penalize the company. There are three types of safe harbor methods: ● Qualified independent appraiser method ● The illiquid start-up method ● Non-lapse restriction valuation method 4. Can 409A valuation be done in-house?

  2. While companies have the option to conduct 409A valuation in-house, the burden to prove that the stock options are not undervalued is then with the company. An independent appraiser will transfer the onus of proof on the IRS. 5. What is the risk of non-compliance? Non-compliance with 409A valuation can be very harmful for the company. ● If a company is non-compliant with IRC section 409A, it can result in adverse tax consequences for the recipient of the tax option. There would also be additional penalties and interest charges to the company. ● Compliance with 409A valuation is a part of the due diligence checklist of every investor and acquirer. Hence, any investment or M&A process can get derailed due to non-compliance. For More Information Click The Below Iink https://www.aranca.com/409a-faqs.php

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