Getting a 409A did seem to be pretty dumb. It's just a super-expensive process to figure out how much taxes you have to pay on option grants. If the rules were just, a grant of startup stock doesn't get taxed until an IPO or acquisition, so you don't have to do options in the first place, that would be much saner!
Valuation Shell Game: the 409A valuation
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Re: Valuation Shell Game: the 409A valuation
#12If 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.
A simple alternative would be to tax startup shares when they turn into real money, not when they are granted and all sorts of shenanigans are possible around their value.
Re: Valuation Shell Game: the 409A valuation
#13This 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?
If you give an option where the strike price is "the current fair value", the employee doesn't have to pay taxes. But "the fair value" is defined by the 409A. The company usually doesn't care about the strike price and would rather just give the employee as much value as possible. A low 409A is much better for the employee, a teeny bit worse for the company, and so companies just go for a low one.
Re: Valuation Shell Game: the 409A valuation
#14Couple of things that are not correct in the article:
(1) a $50,000 fee for a valuation is crazy- early stage companies pay less than 1/10th that.
(2) companies typically do not get a valuation done more than once per year. the article makes it sound like you get a new one every time you issue options, they actually have a shelf life of one-year, unless there is a new financing or other event that requires a new report to be obtained.
Not saying its a good system (it's not), just odd that the NYT would get some basic facts wrong.
Re: Valuation Shell Game: the 409A valuation
#15This 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?
Lower cost basis for all your equity.
Re: Valuation Shell Game: the 409A valuation
#16We scam you with the 409a and you scam us with the AMT.
This is... Actually beautifully succinct.
Re: Valuation Shell Game: the 409A valuation
#17Couple of things that are not correct in the article: (1) a $50,000 fee for a valuation is crazy- early stage companies pay less than 1/10th that. (2) companies typically do not get a valuation done more than once per year. the article makes it sound like you get a new one every time you issue options, they actually have a shelf life of one-year, unless there is a new financing or other event that requires a new repo…
I would imagine that it could also be bundled in with the other legal and tax services a growing startup requires?
Re: Valuation Shell Game: the 409A valuation
#18[deleted]
Re: Valuation Shell Game: the 409A valuation
#19The 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 compuls…
On Tuesday I spend a hundred bucks and start a Delaware LLC that has no assets and no business plan - what's the company worth? Most would say $0 or close to $0.
After breakfast on Wednesday I spend a couple hours on an abstract powerpoint deck, make a bunch of phone calls, and by dinner time (based on past successes and personal network) I have $1m in seed funds committed at a $5m pre-money valuation. What's the company worth then?
It's one of the best tax incentives out there, in that successful founders and very early employees usually pay long-term capital gains on near zero-basis stock.
Re: Valuation Shell Game: the 409A valuation
#20Couple of things that are not correct in the article: (1) a $50,000 fee for a valuation is crazy- early stage companies pay less than 1/10th that. (2) companies typically do not get a valuation done more than once per year. the article makes it sound like you get a new one every time you issue options, they actually have a shelf life of one-year, unless there is a new financing or other event that requires a new repo…
Thanks for calling out these major factual errors. I can confirm your corrections. What a terrible article!