Guide to 409A Valuations
What is a 409A?
The price per share of public companies is easy to determine - it is the stock price. The price per share for private companies is harder to know because there is no liquid market for buyers.A 409A valuation is an independent appraisal of your company that sets the price of your startup's shares. A third-party auditor reviews your company's financial information to determine the price of your shares.
Why do startups need a 409A valuation?
Startups need a 409A valuation to determine the price of the shares and give options to employees. A missing 409A valuation can cause tax trouble down the road:
1. Due diligence: Think of the 409A valuation as paying taxes. While your chance of being audited is low, if you do get audited, it can cause a lot of headaches. Investors expect to see the valuation during due diligence in financing rounds. Potential acquirers expect to see your valuation in secondary transactions and M&A. A missing 409A valuation can deter future investors and acquirers and cost thousands in legal fees to fix.
2. Huge tax penalties for your employees: If the price of shares are too low, they may not be defensible. Employees will who exercise their options will need to pay significant taxes to exercise their options.
When do I need a 409A valuation?
At least once a year or after a material event (like closing your next round). If you are planning to raise, wait until after you fundraise to start your 409A valuation.
1. I only raised on SAFEs. Do I need a 409A valuation
SAFEs are a form of investment, and most startup lawyers advise getting a 409A valuation. With seed rounds reading $20+ million on SAFE, getting a 409A valuation is a way to ensure you can legally give options to your employees. Ask your lawyer to confirm whether you need a 409A valuation if you're raised on SAFEs (note asking your lawyer may cost more than the valuation)
2. My SAFEs were on an $X million cap, can't I just use that number?
No, the valuation an investor uses is not the valuation a third party will use, particularly because SAFEs will convert to preferred stock, not common.
3. I'm a pre-revenue startup, so my valuation is 0. Do I need a 409A valuation?
Yes, even if you aren't making money, the valuation of your company may not be $0. A 409A valuation expert looks at you finances and revenue to determine your valuation.
How do I get a 409A valuation?
Pulley works with Aranca for your 409A valuation. Aranca has been in business for over a decade and has a 100% audit-proof defensibility on all of their reports. We intentionally use a third-party, independent provider (vs in-house) to remove any conflict of interest when generating your valuation. Pulley has a 5 day turnaround for your 409A so you can start hiring sooner.
Pulley's premium plan covers a 409A and other features to help you understand your equity and save you tens of thousands in the future. Email email@example.com to get started today.