How much does a 409A valuation cost?

Kruze Consulting Startup Q&A Author
Vanessa Kruze Founder, CPA

Kruze Consulting 409A Valuation

Kruze Consulting offers value based 409A Valuations:

Kruze Consulting 409A Valuations Prices

Kruze charges $1,500 for a seed-funded company 409A valuation, $2,000 for a Series A, $2,500 for a Series B and $3,000 for a Series C. As a frame of reference, you’ll find that other firms charge $4,000+ for a Seed Stage 409A, and $5,000+ for a Series A 409As. Other companies sign you up for a monthly recurring charge that eventually can equal thousands of dollars a year in costs.

Valuations Performed by Top 409A 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. Unlike many valuation companies, they are responsive to a company’s unique needs and will work to make sure that the valuation report takes into account each startup’s particular situation. 

Why Not Just Use a Capitalization Table Software Vendor?

Some of the capitalization table software vendors now offer 409A valuations for “free.” The biggest issue that we’ve seen with these valuations is that they don’t always have the understanding or flexibility to adjust their numbers based on your company’s unique circumstances. In particular, we’ve seen way too many of these valuations come in at a VERY high number, meaning that your new employees are going to be burdened with incorrectly high strike prices on their options. This really hurts your recruiting efforts.

Why do these software companies come up with unreasonably high valuations? Mainly because they don’t have enough experienced valuation professionals to really understand what is going on in the business. Instead, they have built software (or maybe it’s just a big Excel spreadsheet, who knows) that is run by junior “call center” level people. These people don’t have the training or authority to challenge the numeric output from their software. And since the valuation is “free” they are not incentivized to spend the time to come up with the right number. If you feel like your cap table company has come up with too high of a 409A valuation, see if our team can put in the time to really understand what your company is worth. 

What is included in the 409A report?

The process begins by thoroughly analyzing your financial history and your financial model, while also taking into consideration the intangible value of your startup in the current economic state. 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. Upon conclusion of our findings, you will receive a 30+ page in depth 409A report that is readily shareable with your investors and Board.

Startup Funding Level Kruze 409A Cost What Others Charge
Seed $1,500 $4,000
Series A $2,000 $5,000
Series B $2,500 $5,000+
Series C $3,000 $5000+

 

When does a Startup need a 409A valuation? 

A startup will need to start issuing 409A reports before it issues equity compensation (options/NQSO/ISO). A 409A Valuation through Kruze Consulting can be completed in 10 business days. The valuation is valid for 12 Months unless the startup raises another round of capital or has significant changes, at which point a new valuation is highly recommended. 

What Methodologies are Used in a Good 409A?

Typically one to three different methodologies are used.  The most frequent way is what’s called a Back Solve Method. This takes into account the most recent preferred stock valuation, which the price that the most recent venture capital investment happened at. And it is discounted back, usually so that the common stock is worth about 30% to 40% of the price of the preferred stock.

The second way that stock options are valued are on a Cost to Recreate basis. This means that you tried to build all the technology again, how much would it cost? There is certainly some subjectivity in this, and it also requires some work by the founder to fill out a very detailed worksheet that says how much all this would have cost to build.

The final method is called a Discount Cash Flow Analysis. This attempts to project the cash flows into the future and discount them back to a current value. This method works well for more mature companies, but isn’t very good for early-stage companies because they lose money for a long time. And the discount rates bump all over the place and can be rather subjective. So this is not the best way to value an early-stage business. 

Why Does a Startup Need a 409A Valuation?

Stock options are a great incentive tool for startups. When employees can participate in the upside of their company, they work harder and smarter. Startups need 409A reporting because the IRS requires that options be priced at or above fair market value. Otherwise, issuing “cheap stock,” or options priced below fair market creates a taxable event for the employees receiving the options. A startup should get regular 409A valuations to protect itself and its employees from a taxable event.

 

If you’re interested in getting a 409A, please feel free to reach out to vanessa@kruzeconsulting.com

About us: Kruze Consulting provides all things Startup Accounting, Finance, Tax, & HR in one stop. We believe in leveraging software to save our clients time and money so that we can focus on higher value add activities. Check out our bookkeeping for startups to learn more about how we help founders focus on running their business. Our team comes from the Big 4 and venture capital-backed startups.*

**Pricing subject to change based on each company’s unique business situation.

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