How do you select a 409a valuation firm to provide the issue price of stock options? This article will dive into the reasons why a 409a valuation is required. It will also address questions to ask when interviewing a 409a valuation firm. Peak Business Valuation, business appraiser, provides 409a valuations on a limited basis. We are happy to connect you with a quality provider if we are not the best fit for your needs. Schedule a free consultation to get started.
How to Issue Stock Options
As an owner of Peak Business Valuation, a valuation firm, I hear time and time again, “I promised stock options to my employees and have yet to deliver”. Issuing stock options should be simple. But due to IRC Section 409a, created through the American Jobs Creation Act of 2004, employers simply cannot issue options with an exercise price that “feels right”. The US Government wants its share of taxable income at the time of exercising stock options.
Within the United States, equity compensation plans require businesses to ensure the targeted exercise price is supported by the fair market value of a business’s common stock as of the option grant date. Suppose a company desires to issue options or any other form of deferred compensation to its employees. In that case, the company must seek an expert adviser who will give a fair/conservative assessment.
Selecting a 409a Valuation Provider
How should companies go about selecting an adviser among the hundreds and even thousands of valuation firms in the country? According to the IRS, a firm should have significant experience. The IRS defines this as at least five years of relevant experience in business valuations. The AICPA Practice AID suggests that companies select a valuation specialist with professional certifications (for example: ABV, CPA, CVA). In addition, it is important to consider the valuation company’s reputation. A simple Google search should be sufficient. Another option is to choose a cap table management company, like Carta or Capshare, which works with providers to prepare 409a valuations for clients. Lastly, review the provider’s experience.
Questions to Ask a 409a Valuation Firm
Beyond the suggestions from the AICPA, companies should do the following when selecting a 409a valuation firm.
- Ask if the provider has an audited 409a report
- Though quantity is not directly correlated with experience, ask if the provider has experience working with clients in your particular industry.
- Ask for a sample report
Overall, the IRS takes the 409a valuation seriously. Undervaluing the company, or not having a 409a performed can lead to severe penalties imposed by the IRS. In contrast, overvaluing the company will cause employees to recognize less income than they otherwise would have. Determining the fair market value and the value per Common Stock share is a tightrope walk for providers. But, an experienced provider understands how to maneuver across and deliver reports that satisfy both parties.
Summary
It’s time to circle back to the issue I presented at the beginning of this post. If you’ve promised stock options to employees, deliver on that promise. Your employees will appreciate your integrity.
If you are looking for a provider, Peak Business Valuation provides 409a valuations and works with several 409a valuation providers. We are happy to answer questions you have about issuing stock options and 409a valuations. Schedule a free consultation using the link below.
