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Valuation Shell Game: the 409A valuation

nytimes.com

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Re: Valuation Shell Game: the 409A valuation

#21

Post by idunno246 »

Buge wrote: post #10

This 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?

The 409a value is the strike price, say it's $1. Your investor comes in and buys for $10. Every new employee that comes in, you say 'you can buy it for $1 and sell for $10, so each share is worth $9,' which is basically lying to make the comp package sound better and hire people for less money. To be less cynical, the lower you force the strike price, the less anyone getting new shares has to pay to buy it. Early on, it's much easier to early exercise and buy them if its cheaper. Everyone gets more profit if they can buy at a discount, so they try to discount options as much as possible

Re: Valuation Shell Game: the 409A valuation

#22

Post by briandear »

lacker wrote: post #12
advisedwang wrote: post #4

If 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.

Exactly. The current system is taxing eggs before they hatch into chickens. You're paying taxes on potential income rather than actual income. If the eggs break before they hatch -- too bad.

The weird thing is that if a stock loses value, you can't claim a deduction for the loss until that loss is actually realized, yet you can get taxed on shares before any gain is realized.

It's all Monopoly money until it becomes actual cash.

Re: Valuation Shell Game: the 409A valuation

#23

Post by calcsam »

It's pretty common knowledge that 409a valuations are underestimations of real value. What isn't well known is by how much. It would be great to see VCs with 20 years of data compare how much their preferred shares were worth vs of they had held common instead. Then again, publicly available data like that might invite an SEC crackdown. Be careful what you wish for.

Re: Valuation Shell Game: the 409A valuation

#24

Post by snarf »

jalonso510 wrote: post #14

Couple 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…

The funny thing is that the author of this article is a former (longtime) investment banker. I found the line where he describes the lack of liquidity in private shares "falls especially hard on early investors who are not company employees, those so-called 'series A' or 'series B' venture-capital investors" especially amusing. As if we are supposed to feel more sorry for VCs who are diversified in many investments than employees who aren't.

Re: Valuation Shell Game: the 409A valuation

#25

Post by jeronpaul »

jalonso510 wrote: post #14

Couple 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 completely agree with this. 1) I have never seen a startup pay anything close to that. 2) you are so right--you generally only need 1 every 12 months (at most!). There are some exceptions but they are rare. Some valuation providers sell 409As as if you need them monthly or something. That is absurd.

Re: Valuation Shell Game: the 409A valuation

#26

Post by jeronpaul »

jalonso510 wrote: post #14

Couple 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 completely agree with this. 1) I have never seen a startup pay anything close to that. 2) you are so right--you generally only need 1 every 12 months (at most!). There are some exceptions but they are rare. Some valuation providers sell 409As as if you need them monthly or something. That is absurd.

Re: Valuation Shell Game: the 409A valuation

#27

Post by timriser »

The article says that 409a valuations are imprecise, costly, and unnecessary tools that enable founders to prevent the secondary sale of company stock, and disenfranchise employees and early investors.

This is almost 100% hyperventilation.

I took to Medium to try and explain that 409a valuations are: a government-required, largely commoditized service; a consistent, objective approach to dealing with the uncertainty of startups; nothing more than the translation of the startup’s underlying business fundamentals.

Link: https://medium.com/@tim.riser/startup-valuations-are-no-shel...

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