A 409A valuation provides a company with the fair market value of common stock. This valuation will allow you to issue equity-based compensation to employees at fair market value, including stock options, restricted shares, and other share-based equity instruments. Newer companies that issue equity-based compensation often have intricate capital structures with various classes of stock and equity awards. Often, complex methods are required to value common stock in the context of complex capitalization.
Any private company that wishes to issue equity based compensation to employees typically needs a 409A valuation in order to qualify for safe harbor under IRC Section 409A. Equity-based compensation needs to be issued at or above fair value in order to avoid significant tax penalties, including a 20 percent federal income tax penalty and varying state tax penalties. A 409A valuation will ensure that you avoid the major tax penalties associated with incorrectly issuing equity-based compensation. A new 409A valuation must be performed whenever there is a material corporate event including, but not limited to:
- Issuing employee stock options for the first time
- Raising a round of funding
- Turnover of significant employees in leadership positions
- Any significant change to business operations or plans
- Generating first revenue or achieving profitability
- A previous 409A valuation is over one year old
Do not rely on thoughtless automated providers that are only concerned with growing the top line, often at the expense of service and expertise. An improper valuation can lead to numerous unintended consequences, including major tax penalties for employees and the Company. Redwood is committed to providing accurate, timely, and informed opinions of value that reflect your company’s risks and stage of development and will withstand scrutiny by auditors, attorneys, lenders, and regulatory agencies. Our focus on valuation enables us to attain the highest level of technical proficiency and maintain superior valuation standards. Redwood has completed thousands of 409A valuations, and our team of valuation specialists have a diverse background of experience, including venture capital, corporate finance, early stage start-up, and financial services. Our holistic perspective sets us apart from other specialists, and we pride ourselves on providing the best service for our clients, while maintaining independence and defensibility.