A 409A valuation is an appraisal of the common stock of a private company made by an independent third party. The cost of these appraisals is often covered by start-ups, which use the data to determine the price at which employees can purchase shares of the company’s common stock.

Valuation Date in 409A Valuation

The Valuation Date is when a value (price in dollars or any applicable currency) is assigned to the company being appraised. When an asset needs to be appraised before it is sold or distributed, or when its value needs to be periodically approximated for reporting, the term Valuation Date is used.

The IRS states a valuation date is necessary for the 409A valuation process. The valuation date is not the same day the 409A valuation report is issued. This date is called the Reporting Date.

409A Valuation

Selecting the 409A Valuation Date

When selecting a valuation date, a number of factors should be taken into account, and the selection should be discussed with the company’s legal counsel before being made. A maximum of twelve months is the validity of a 409A valuation.

Before getting to the Valuation Date, it is important to understand some technical terms. Let us explain those technical terms:

Material Events: They are Internal or External events that impact the financial valuation of a company. Examples of Internal events will be a big client either coming or leaving an organization, the company being involved in a new litigation, an important patent being filed by the company, a strategic partner leaving the company, etc. Examples of External events will be pandemics, market turmoil, new government announcements impacting the industry, new technology, shift in industry trends, etc. These events will either significantly increase increase or decrease the valuation of a company.

The material events are important to the financial valuation of a company and therefore the previous valuation (if any) becomes stale/irrelevant. A fresh valuation is thus required to assess its impact. It is the responsibility of the company to inform the 409A valuation firm of these material events that have occurred in the past.

Option Grant Date: The date at which an stock option is granted to the employees or to any other members by the company.

Accounting Closing Date: The date at which a company closes the financial statements for a period. Accounting closing can be performed monthly, quarterly, half-yearly, or (sometimes) yearly.

A company that seeks 409A valuation needs to check if they require the valuation under IRS 409A regulation. You can check the details on your company’s eligibility for the same here.

If your company qualifies for the same, follow the detailed steps as illustrated in the flowchart below:

Let us understand the flowchart with the help of few hypothetical Instances. In each of the cases, a company needs to finalize the Option Grant Date and must state the Accounting Closing Date.

Determining 409A Valuation Date when there are no Material Events:

Instance 1:

Option Grant Date: December 8, 2022 (X)

Accounting Closing Date: Monthly.

Recent accounts closed on November 30, 2022 (Y)

Valuation Date: November 30, 2022 (Y)

Instance 2:

The Grant Date of the stock: is December 8, 2022 (X)

Accounts Closing Date: Yearly

Recent accounts closed on December 31, 2022 (Y)

Valuation Date: December 31, 2021 (Y)

Instance 3:

The Grant Date of the stock: is December 8, 2022 (X)

Accounts Closing Date: Quarterly

Last Closed on September 30, 2022 (Y)

Valuation Date: September 30, 2022 (Y)

 

Determining 409A Valuation Date with Material Events:

Instance 1:

Option Grant Date: December 8, 2022 (X)

Account Closing Date: Quarterly. Last close was on September 30, 2022 (Y)

Material Event 1: April 9, 2022

Material Event 2: July 31, 2022

Valuation Date: September 30, 2022 (Y)

Note: As both the material events took place before the Accounting Closing Date (Y), it is considered to be the Valuation Date.

Instance 2:

Option Grant Date: December 8, 2022 (X)

Accounting Closing Date: Yearly. Last close was on December 31, 2021 (Y)

Material Event 1: April 9, 2022

Material Event 2: July 31, 2022 (Z)

Valuation Date: September 30, 2022 (any date between Z and X)

Note: The material events took place after the last Accounting Closing Date (Y) and Option Grant Date (X). Any date between the Option Grant Date (X) and the last material event date (Z) is chosen for the valuation. Therefore, September 30, 2022 is a valid Valuation Date.

Instance 3:

Option Grant Date 1: March 21, 2022

Option Grant Date 2: April 5, 2022

Option Grant Date 3: May 15, 2022

Option Grant Date 4: August 16, 2022

Accounting Closing Date: Yearly. Last closing was on December 31, 2021 (Y)

Material Event 1: April 9, 2022

Material Event 2: July 31, 2022

Let’s begin to understand the Valuation Dates for the above-mentioned scenario.

Option Grant Date 1:

X1: March 21, 2022

Y1: December 31, 2021

Z1: NA

Valuation Date: December 31, 2021 (Y1)

Option Grant Date 2:

X2: April 5, 2022

Y2: December 31, 2021

Z2: NA

Valuation Date: December 31, 2021 (Y2)

Note: The Valuation Dates in the above cases is same and therefore only one valuation is needed.

Option Grant Date 3:

X3: May 15, 2022

Y3: December 31, 2021

Z3: April 9, 2022

Valuation Date: April 30, 2022 (any date between Z3 and X3).

Note: As Material Event 2 took place after Option Grant Date 3, therefore that event is not considered to be Z3.

Option Grant Date 4:

X4: August 16, 2022

Y4: December 31, 2021

Z4: July 31, 2022

Valuation Date: July 31, 2022 (any date between Z4 and X4).

Note: In this whole scenario the company will need three 409A valuation reports with three different valuation dates.

Wrap up!

The Valuation Date is crucial for a 409A valuation report. A company that is planning to get a 409A valuation should have basic idea about the Valuation Dates. You can get in touch with the experts of Sharp 409A for in-depth consultation on the Valuation Date for a 409A valuation.

 

 

Topic: 409A Valuation