409A Valuation for Startups

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Vanessa Kruze, CPA Kruze Consulting

Vanessa Kruze, CPA 
Kruze Consulting Founder
Former Startup Controller

High Quality 409A's at a Discounted Price

If you're a startup issuing equity compensation (options/NQSO/ISO), you'll need a 409A for tax purposes

Seed Stage
Series A
Series B
Series C

What We Offer

Group of People IconTop 409 Firms

Our valuation partners have the highest certifications and designations and perform over 150 409A valuations per month. They are former Big 4 valuation partners and investment bankers from top firms. No work is done offshore.

valuation methodologies IconAudit Defensible

We apply valuation methodologies and assumptions that are specifically tailored to your unique situation. The valuation methodology follows AICPA and USAPAP guidelines closely making the reports audit ready.

Valuations Terms IconCompleted in 10 Business Days

Valuations are completed 10 Business Days from the date that all company information is submitted. For Kruze clients, that’s easy because we already have your info in our systems.

In Depth Report IconIn Depth Report

Upon conclusion of our findings, you will receive a 30+ page in depth 409A report that is readily shareable with your investors and Board.

Validation IconValid for 12 Months

Unless there are significant changes like a new investment round.

Cost Effective IconCost Effective

Our economies of scale bring the cost down without compromising quality.

Interested in a 409A for tax purposes?

We can help you through every step of the process: from understanding key terms to getting the best deal.*

Docs Needed for a 409A Valuation

Lawyer to Provide

  • Cap Table
  • Last round of financing (date, # of shares, price)
  • Applicable ledgers
  • Number of options/warrants including applicable strike prices
  • Number of options to be issued in next 12 months
  • Most recent amended articles of incorporation

CFO/Kruze to Provide

  • Balance Sheet as of valuation date
  • Income Statement as of valuation date
  • Historical financial statements (preferably 1-3 yrs)
  • Financial Model for 18-36 months

Company to Provide

  • Pitch Deck
  • Timing of most likely liquidity event
  • In regards to the Series Seed round you plan on raising this quarter: Will it be convertible debt, preferred stock, or both? Has Company accepted a written offer? Is there a signed term sheet? Do you expect the anticipated financing to be included pro-forma in this 409A valuation?
  • 2-5 Public Comp suggestions
  • Private comp suggestions
  • Name of external legal counsel

Name of External Audit Firm:

Kruze Consulting, Inc.

Why do I need a 409A valuation?

When you are running a startup, the last thing you want to worry about is what seems like government paperwork. We get that. Unfortunately, the IRS wants your startup to have a 409A valuation so they can make sure that your common stock options have the appropriate strike price. Your employees common stock options are worth something - the 409A helps the IRS compute that worth for tax purposes.

Years ago the board of directors used to just make up a number for the strike price for options. Oftentimes that was usually one penny - because it's the simplest thing to do, and it’s pretty employee friendly (who doesn’t want a super cheap strike price on their options?!) But the IRS realized that that usually wasn't representative of the real value or price per share of those options, and so they started mandating that companies opine on the exercise price by doing an academic exercise called the 409A.

When you hire a firm to conduct this work, what you are really paying for is audit protection. You're making sure that you have an independent, third-party, place a value on your company/value the common stock with the standard documentation that the IRS wants to see.

What should I do if my 409A valuation is too high?

If it seems like your 409A valuation is too high, you aren’t alone. We are seeing this quite a bit now - especially from the capitalization software vendors who offer “free” 409A’s. But, what can you do?

There is a very systemic problem in the startup world with valuations coming in too high, and the reason for that is 409A providers are heavily scrutinized by two groups. The first are the valuation accreditation entities. These bodies audit and analyze the work of the valuation providers to make sure they're doing everything in compliance with the current, accepted methodologies. The second is the IRS. The IRS really wants these valuations to be fair - as in, not too low - because if they're too low, a bigger percentage of the taxes paid by employees when your startup exit happens come as capital gains taxes, which have a lower tax rate.

Overly high valuations are becoming more and more common, because this pressure from the IRS and accreditation entities ends up pushing the valuation people to be more conservative, and more conservative in valuations means a higher valuation. It means that your company, on paper, even though you probably haven't accomplished a ton yet because you're still a startup, is going to have a much, much higher valuation. That hurts your employees, and may make it harder for you to hire the best talent.

More founders than ever have been coming to Kruze because their capitalization table provider’s 409A valuation was just too high. In general, we see that these firms are staffed by junior people who don't have a lot of discretion to make any changes or judgment calls to the conservative methodologies and assumptions.

There are ways to get a better outcome. In particular, so much of a valuation comes down the unique circumstances facing an individual startup. That diligence can influence a number of the equations and assumptions, and can help your company reach a more reasonable outcome. Here are some of the tactics you can use if you feel that your current provider is coming in too high:

  • Ask the provider if they are working off of the preferred share price, especially if you recently closed a venture capital round. They may be using the “backsolve method,” which basically means that they are working backward off of the preferred stock price to compute the common stock price. However, the VC investors may have a whole slew of rights and privileges associated with the preferred that the common does not have. Those rights, especially if there is a liquidation preference - make the preferred stock worth a whole lot more than the common shares.

  • Secondly, make sure you give appropriately conservative financials to the valuation team. The pie in the sky financials that you used to woo the VCs may be too aggressive. If you think that there is any chance that you are unlikely to hit those numbers, then you should offer up a more realistic, conservative case. You can offer projections that are both honest and conservative. One thing to try is to make it take longer for you to hit your big, out-year, $100 million revenue number, for example. We find that this usually takes longer than people project, so you can do this honestly.

  • The third thing you want to do is make sure you pick your comparable companies intelligently. If you are a hardware company, don’t use Google as a comparable. Stay away from the super hot IPOs, as those are usually overly valued.

The right ratio should be around 25 to 35% of common to preferred, meaning if preferred is $1, you want common to be somewhere around 25 cents, 30 cents. If it’s too much higher than that, you have a right to ask your provider for more information.

And our valuation partners regularly help startups who have gotten too high of a valuation from their cap table vendor, so reach out to us if you want a second opinion. Contact us now.

Consulting, Tax and Valuation Prices

Competitively priced for high-growth companies

See our monthly pricing plans

Financial Consulting

Staff Accountant $85
Senior Staff Accountant $110
Controller $140
Financial Modeling $300
Venture Debt $300
CFO $300
Tax Advisory $395

Startup 409A Valuation

Seed $2,000
Seed A $2,500
Seed B $3,000
Seed C $3,500

Information for Every Startup

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