As soon as your startup establishes a stock incentive plan and issues stock options to employees or other stakeholders, it’s time to work on a 409A valuation.
This is a valuation of your startup for assigning a cost basis to the stock options.
The U.S. tax code in section 409A requires private companies to show that their common stock options are issued at fair market value.
This is similar to the property tax on your house in which the government assigns a valuation to your house for tax purposes.
The 409A valuation does not mean your firm is actually worth that valuation. It’s only used to calculate your taxes.
The market value goes up and down based on the state of the market and what value you have built into the business which increases every day for some companies.
Employees, founders, and other investors are taxed on the value of the stock options they own and to avoid potential tax penalties, the startup must get a formal valuation opinion at least once every 12 months.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.