Valuation Shell Game: the 409A valuation
nytimes.com
Valuation Shell Game: the 409A valuation
1–10 of 27 posts
Re: Valuation Shell Game: the 409A valuation
#2My understanding is the 409A is supposed to be a true valuation of the company, not of the shares. The price of shares sold to investors (probably with liquidation preferences, extra voting rights, maybe a board seat, etc) of course costs more than the company's value divided by number of shares.
Re: Valuation Shell Game: the 409A valuation
#3My understanding is the 409A is supposed to be a true valuation of the company, not of the shares. The price of shares sold to investors (probably with liquidation preferences, extra voting rights, maybe a board seat, etc) of course costs more than the company's value divided by number of shares.
It's both, they start by calculating enterprise value, then from there estimate the value of the common stock taking into account the things you mention - then divide that by number of shares (including those expected to be issued shortly).
Re: Valuation Shell Game: the 409A valuation
#4If you are going to tax values of the shares then you have to decide _some_ price. What is the alternative? Using the last financing round is just as crazy and even easier to game.
Re: Valuation Shell Game: the 409A valuation
#5We scam you with the 409a and you scam us with the AMT.
Re: Valuation Shell Game: the 409A valuation
#6The fact is that nobody can really know with certainty the true valuation of an early-stage company. Even venture investors just come to a negotiated deal and subsequent events often prove them wrong. That said, the definition of true value is probably whatever price is implied by a market deal between a willing seller and buyer both of which have access to all relevant facts and neither of which is under any compulsion to do a deal (so basically a venture capital transaction would qualify). The article correctly points out that valuation firms aren't market participants (i.e., actual buyers) so they are just doing their best to guess at a value--not establishing a value. The article also points to false precision--which most honest valuation folks agree to. They still have to do their best to come up with a defensible valuation but they recognize that it is just an educated guess. Finally the article points to the difference between common and preferred stock prices as if that is a scam. While you can definitely debate how close the two should be relative to each other, it's totally crazy (IMHO) to say that common should have the same value as preferred.
Re: Valuation Shell Game: the 409A valuation
#7We need an overhaul of private stock options in general. These shares sit at the bottom of the capital stack which means as that stack gets higher risks increase. The fact that someone needs to pay tax before these options are excerised is ridiculous. If the US wants to stimulate innovation they should stop gouging risk taking employees and focus their efforts on Wall Street.
Re: Valuation Shell Game: the 409A valuation
#8Btw, full disclosure I founded and sold Scalar Analytics, a valuation firm and am currently the CEO of Capshare.
Re: Valuation Shell Game: the 409A valuation
#9My understanding is the 409A is supposed to be a true valuation of the company, not of the shares. The price of shares sold to investors (probably with liquidation preferences, extra voting rights, maybe a board seat, etc) of course costs more than the company's value divided by number of shares.
409a includes the valuation of the stock held, which is often discounted by "accepted discount factors" such as illiquidity discount and marketability discount. The latter being the fact that a common shareholder often has resale restrictions on their stock.
Re: Valuation Shell Game: the 409A valuation
#10This article is frustrating because it never mentions why low 409A valuations would be helpful to anyone. It seems to say the companies are benefiting from different 409A and investor valuations, but not why. Does it mean someone pays less tax or something?