A 409A valuation is an appraisal of the fair market value (FMV) of a private company’s common stock by an independent appraiser. The valuation is used to determine the cost to purchase a share and comes from section 409A of the IRS’s internal revenue code (IRC)…
If you want to offer equity in your company, you’ll need to have a 409A valuation done to determine how much each share is worth. Without this valuation, you won’t be able to accurately offer equity to potential investors.
How Much Does a 409A Valuation Cost?
409A valuations for startups and small businesses usually fall in the ballpark of $1,000 to $5,000, but it could be upwards of $10,000 for larger corporations. The size and complexity of your company will affect the price of the valuation. For example, a Series A company will most likely end up paying $1,000-$3,000 while a Series B-C company can expect to pay $3,000-$5,000. Keep in mind that the final cost also depends on which firm you choose to perform the valuation.
The best way to determine the likelihood of a challenge by the IRS is to get a 409A valuation done by an independent firm. This will help you avoid any potential trouble with the IRS and give you peace of mind. Depending on your company’s age and industry, the valuation may cost less than you think. Contact a professional firm to find out.
Factors That Determine 409a Valuation Cost
Factors determining 409A Valuation Cost are as under:
- 1. Stage of the Company- It’s crucial to look into what stage the company is in before getting a 409A valuation because the key shareholders, assets, and value varies from stage to stage. A company’s seed funding round is the first opportunity for investors to support the company financially – at this point, the company may not have a lot of value which is why the price for valuing a company during this stage is normally cheaper in comparison to other rounds. As your company grows with each funding round, different stocks and equity options become available, which in turn drives up the price. The 409A valuation process becomes more intensive as we move to the next stage, so the costs also increase.
- 2. Size of the Company- Another factor that 409A valuations take into account is company size – specifically, how many employees the company has. The reasoning behind this is that smaller companies with less complex operations tend to be less expensive to value than larger companies. As a company grows and its operations become more complex, the 409A valuation process becomes more difficult and the cost of the valuation increases.
- 3. The Complexity of Share Structure- Consider ‘How Much Does a 409A Valuation Cost?’ – A simple share structure for a company means that there is only one kind of equity class and that only common shares are issued. This is often the case for a company that has just been incorporated and typically only has the founders and a few employees. However, as the company grows, the share structure becomes more complex. With a complex share structure, it can be difficult to get an accurate valuation. The complexity in the company share structure may contribute to a higher 409a valuation cost.
- 4. Industry of the Company- Businesses that are considered to be more traditional, such as trading companies and brick-and-mortar businesses, generally cost less to get a valuation done because their company operations are more straightforward to forecast future earnings. However, specialized businesses such as tech companies or fintech companies are often less predictable and therefore may cost more to value. The industry a business belongs to affects the costs of valuation because every industry has a different way of conducting business and different values. So, it is important to look into the industry, understand its value, see how things are valued in the industry, and value the assets of the company accordingly.
- 5. Age of the Company- New company does not have any stable operations going on. And due to this, it takes longer to forecast the sales of the company and get the value. The age of a company can play a role in the 409a valuation cost. A company that is just starting up may cost more to evaluate because there are more variables involved in its success. However, an older company is easier to predict because it already has stable operations. This makes it simpler for the valuator to project future sales and costs, which in turn lowers the overall 409a valuation cost.
The Problem with 409a Valuation Costs
A 409A valuation will give you the fair market value (FMV) of your company’s common stock. It’s important to have an accurate picture of your company’s worth so that you can make sound decisions about its future. You need to know your current FMV any time you issue new stock options, warrants, or stock appreciation rights. That’s because you must use your company’s fair market value to determine the minimum strike price for these instruments. Furthermore, any material changes to your company—such as a new round of financing—requires a new 409A valuation. In any case, you’ll need a new 409A if your last one is more than 12 months old.
When considering ‘How Much Does a 409A Valuation Cost?’ it’s important to factor in how often you’ll need them. For some companies, $3,000 for a single valuation may not be a big deal. But if you need 2-3 valuations per year, that $3,000 starts to add up. So, when determining the ideal annual cost of 409A valuations, you’ll need to multiply the quoted cost by the number of valuations you expect to have in a year.