What Is A 409A Valuation?
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
As a company grows and starts looking at their options for offering stock options or restricted stock options to employees, questions will arise over the fair market value of that stock. The Internal Revenue Service (IRS) requires that these equity awards be issued at a price that is no less than the fair market value of the company’s stock. One way to determine the fair market value of a company’s common stock is through a 409A valuation.
While a 409A valuation is not legally required by the IRS or any other governmental authority, it is advisable for companies to get one done if it is practical and affordable. This is because a 409A valuation provides a presumption of fairness, meaning that the strike price (i.e. the price at which stock options can be exercised) is set at the fair market value of the company’s stock. This can help prevent any adverse tax consequences for both the company and the recipient of the equity award.
A 409A valuation is often determined by a third-party corporation and can be expensive for a young company. However, if a company decides not to get a 409A valuation, the board has other options for setting the strike price. We cover some of those options in a blog post here.
In summary, a 409A valuation is a useful tool for companies that grant stock options or restricted stock units to their employees, as it helps ensure that the strike price is set at a fair market value and can prevent any adverse tax consequences. While it is not legally required, it is advisable for companies to get a 409A valuation if it is practical and affordable.
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
As a company grows and starts looking at their options for offering stock options or restricted stock options to employees, questions will arise over the fair market value of that stock. The Internal Revenue Service (IRS) requires that these equity awards be issued at a price that is no less than the fair market value of the company’s stock. One way to determine the fair market value of a company’s common stock is through a 409A valuation.
While a 409A valuation is not legally required by the IRS or any other governmental authority, it is advisable for companies to get one done if it is practical and affordable. This is because a 409A valuation provides a presumption of fairness, meaning that the strike price (i.e. the price at which stock options can be exercised) is set at the fair market value of the company’s stock. This can help prevent any adverse tax consequences for both the company and the recipient of the equity award.
A 409A valuation is often determined by a third-party corporation and can be expensive for a young company. However, if a company decides not to get a 409A valuation, the board has other options for setting the strike price. We cover some of those options in a blog post here.
In summary, a 409A valuation is a useful tool for companies that grant stock options or restricted stock units to their employees, as it helps ensure that the strike price is set at a fair market value and can prevent any adverse tax consequences. While it is not legally required, it is advisable for companies to get a 409A valuation if it is practical and affordable.
