Can you answer yes to any of the following questions?
- Did you raise a round of financing?
- Do you want to issue stock options to new employees?
- Are you issuing restricted stock?
- Are you issuing any warrants on your common stock?
- If you can answer yes to any of these questions then you probably need a 409A valuation.
We get it
We understand that the last thing any start-up wants to worry about is tax compliance, especially when you have so many other things to worry about. Like product development, sales, recruiting, etc… But it is wise for a start-up to think about compliance early on to avoid potential penalties and distracting complications from lack of compliance later down the road. If you don’t know about a particular issue ask a professional like your lawyer, accountant, etc…here is a little background.
What is 409A?
409A refers to Section 409A of the Internal Revenue Code for the Internal Revenue Service (IRS) of the United States of America. This code governs the taxation of non-qualified deferred compensation. Section 409A was added to the Internal Revenue Code in January of 2005, and issued final regulations in 2009.
There are three “safe harbor” methodologies provided by the IRS in regards to setting the fair market value (FMV) of common stock for privately held companies. Almost all VC or angel-backed startups use the following method:
Independent Appraisal Presumption: A valuation performed by a qualified third party appraiser. The valuation is presumed reasonable if the valuation date is set no more than 12 months prior to an applicable stock option grant date and there is no material change from the valuation date to the grant date. If these requirements are met, the burden is on the IRS to prove the valuation was “grossly unreasonable.”
If the valuation does not fall under “safe harbor” then the burden of truth falls on the taxpayer. There are severe penalties for Section 409A violations which include, immediate tax on vesting, additional 20% tax penalty, and penalty interest.
What is a 409A Valuation?
MELD 409A valuations use AICPA-approved methodologies to determine the fair market value (FMV) of your company’s common stock. This FMV is used as the strike price for option grants, and provides 12 months of “safe harbor” from the IRS.
Getting Your 409A Valuation Started
Contact us and we can discuss your situation. We can let you know if you need a 409A valuation, should hold off, or can do without one.