Every Startup who wants to use deferred compensation arrangements (the most popular being stock options) will need to get an outside valuation in order to set the strike price for those arrangements. As the founder, you may believe you are closer to the companies value than anyone else, but you need to go beyond your best guess to satisfy the Internal Revenue Code (IRC) Section 409A. As with all things government related, it’s complicated and can impact your company greatly. The primary purpose of a 409A is to ensure that the proper federal income taxes are paid on deferred compensation arrangements, but it also ensures that these grants are covered by the IRS safe harbor. Specifically, the 409a Valuation arrives at a recommended price at which a stock option can be granted at any point in time. Simply put if your startup wants to offer stock options to employees, then the company needs a 409A valuation to comply with federal tax code regarding the strike price for those options.
Failure to comply will result in the federal government taxing you and your employees for that stock and slapping you with heavy fines, usually a 20 percent tax, as well as interest payments. Not only will it make your employees extremely unhappy, but it also jeopardizes the acquisition potential of your company. Non-Compliance on 409a valuations may raise a red flag to other possible areas where you have failed to comply with state and federal laws.
Once you start granting options, you’ll need to update your valuation at least every 12 months and more frequently in certain circumstances. Countsy does not perform 409a Valuations. However, your Countsy CFO will guide the process to get the best result for you and your employees.