409A VALUATIONSTHE DATA DRIVEN GUIDE

We analyzed equity data for 147 companies

Learn everything you need to know about 409As: How to get the lowest strike price, the max price to pay, questions you should ask and a lot more...

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Get the insider guide on lowering your strike price here:

bit.do/strikeprice

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WHAT IS A 409A VALUATIONA 409A valuation is just a valuation of your company’s common stock.

Preferred(given to investors)

Common Stock(given to employees, founders, and contractors)

Value of Common Stock Today / Your Strike Price

Time

Valu

e of

Com

mon

When you offer your employees stock options, you are offering them the option to purchase common stock at a specific value called the strike price.

Your strike price must never be below the current value of your common stock.

But there are still ways to legally lower your strike price by getting the valuation of your common stock down...

WHEN DO I NEED A 409A VALUATION?

THERE ARE A FEW TRIGGERS

STOCK OPTIONSYou plan to offer stock options to employees or contractors.

12 MONTHSIt has been 12 months since your last 409A.

NEW FUNDINGYour company raises new funding.

SECONDARY SALESPeople start buying and selling the company’s shares (not including the shares you originally issue from your company.)

12

3 OPTIONS FOR GETTING A 409A VALUATION

ProsMuch cheaper.

You may have greater control.

ConsRequires lots of knowledge, experience, education and training.

No safe harbor protection. If you are audited, the burden of proof is on you.

ProsFree.

Takes very little work.

ConsOnly applies to very early stage companies. Must fit specific criteria.

No safe harbor protection. If you are audited, the burden of proof is on you.

Costs money (though prices have gone way down.)

ProsSafe harbor protection. If you are audited, the burden of proof is on the IRS.

A good firm will defend their valuation for you.

Takes very little work.

Cons

Do it yourself Hire a firmUse the DIY 409A tool

bit.do/409a

TIME FRAME AND PROCESS

1-30 days - up to you

(Waiting for you to gather data is the most common cause for delays)

Deliver Your Data15 min - 1 hrReview Draft

1-10 daysFinal Report

10-20 daysRun Report

1-2 daysRevisions

409A SUBSCRIPTIONS + EQUITY SOFTWARE

of all newly VC backed startups are choosing409A + Cap Table Software subscriptions

40% +*

According to 500 startups, Y Combinator, Angelist and several other early stage VC funds...

409A Subscription

Cap Table Software

HOW THE PROCESS IS CHANGING...

409A409A Valuation Report

* estimates ranged from 30-50%

PRIORITIES BY FUNDING STAGE Price

Turnaround Time

Defensibility

10

0

1

2

3

4

5

6

7

...

No Investors Seed Series A Series B Series C+

(On a Scale of 0-10)

6.6

2.3

3.0

6.5 6.6

2.52.9 2.9 2.9

5.9

3.93.6

5.2

2.2

4.8

AVERAGE 409A PRICING TODAY

$1k $2k $3k $4k $5k

No Investors $1,535

Seed $1,591

Series A $1,937

Series B $2,633

Series C+ $4,986

PRICE IS #1

#2

Price trumps every other concern across the board. Even at series D.

Getting a reputable firm is still essential, but beyond that price is #1.

DEFENSIBILITY ISDefensibility only becomes a serious priority between Series B and C.

409A PENALTIES

Employees will immediately be taxed regular income tax as soon as their options vest.

If your employees are unable to pay the income taxes above, the IRS may lay additional severe penalties.

Additional risks include a 20% federal penalty, and potentially other taxes, interest, and penalties.

There are some major penalties for underestimating the value of your company and getting your strike price too low.

RISK FACTORS

No Safe Harbor

Protection (You Perform the Valuation)

Incr

ease

s Ri

skD

ecre

ases

Ris

k

Safe Harbor Protection

(A Firm Performs the

Valuation)

Valuator has Proper Creds

(AVA or CVA)

Valuator has No Creds

(No AVA or CVA)

Firm Defends Valuations

Against Audits Inde�nitely

Blacklisted by Audit Firm(s)

A Big 4 Auditor Can

Vouch For Defensibility

Never Struggled

to Pass Audit

Past Valuations Have Been Challenged

Unable to Support

Valuation or Answer Audit

Questions

Lower Strike Price

Higher Strike Price

Firm Speci�c Risk Factors

Here are the major factors that increase or decrease your risk profile:

The firm you choose and especially the actual person within the firm doing the valuation has the biggest impact on your risk profile.

Your risk increases significantly if the firm you choose is unwilling to defend their valuation in the event of an audit.

RISK FACTORS

QUESTIONS TO ASK VALUATION FIRMS

Will my valuation be performed by a person or persons who have proper credentials (an AVA or CVA)?

Just make sure they pass this checklist of questions:

You don’t need the most expensive firm to get a great valuation.

Have you ever had any trouble passing audits with any firm? Have you ever had your work challenged?

How much time do you typically take defending your valuations with audit firms?

Can you give me the name of a large (Big 4 would work) auditor who can vouch for your defensibility.

Have you ever been blacklisted by any of the audit firms?

Will you support your valuation report indefinitely and answer any audit review questions that might come up from now until we exit?

THE DATA BEHIND LOWERING YOUR STRIKE PRICE

Common Stock Preferred Stock

We’ve done valuation analysis on over 400 companies.

We also did an analysis on the reports of competing 409A firms with a sample size of 25.

On average, common stock was valued at 41% of the value of preferred stock.

COMMON STOCK VALUES AS A PERCENTAGE OF PREFERRED

41%

Average ratio

THE DATA BEHIND LOWERING YOUR STRIKE PRICE

The range of percentages of common stock to prefered stock ranged from a low of 17% to a high of 89%

17%

87%

While every company is going to have their own unique circumstances, the above ranges can give you a good feeling for whether your strike price is low or high.

WHEN TO PUSH FOR A LOWER STRIKE PRICE

RANGE OF VALUES

$

As founders of one of the nation’s most successful valuation firms, we reveal all our secrets to safely getting the lowest strike price possible.

We put together a free actionable checklist of our best insider strategies for safely getting your strike price as low as it can possibly go.

It’s not enough to just ask or “negotiate” for a lower strike price.

You need to back it up with the righ questions and have the right evidence.

INSIDER STRATEGIES: HOW TO LOWER YOUR STRIKE PRICE

FREE ACTIONABLE CHECKLIST

Download Checklist

GET THE LOW STRIKE PRICE FREE CHECKLIST

bit.do/strikeprice

GET A 409A FOR $99/mo

capshare.com/409a

Originally posted at https://www.capshare.com/blog/409a-valuation-guide/