Equity Compensation Valuation (IRC 409A/ASC 718)

Equity, option, and derivative valuations depend on a number of variables. How was the price of the underlying enterprise determined? How will pricing and value be determined going forward? These analyses often require complex formulas and key data/assumptions which unfortunately can lead to controversy or dispute.

We often receive calls from corporate finance professionals, referred by their CPA, requesting a “409A” or “stock option valuation.”  These requests are shorthand for Internal Revenue Code (“IRC”) 409A, which refers to tax compliance with the issuance of nonqualified deferred compensation, most commonly in the form of stock options and stock appreciation rights (“SARs”).

What is required from an independent valuation provider is first an opinion of the value of the company’s equity.  Then that value is allocated to the various classes of stock and/or options.  It is from these per share values that the total amount of what the company has or will provide to its employees, typically in the form of options to purchase the common stock at a specific strike price, is determined. 

There are two manners in which the valuation exercise may proceed:

  1. Perform a valuation of the underlying business enterprise, utilizing generally accepted valuation methodologies, and then move forward to a valuation of the equity. Valuing the option or SAR in the specific class of equity may be complicated by a number of other classes and/or tranches of equity in the company’s capitalization table.
  2. For enterprises that have experienced a “recent investment,” a back-solve analysis based on the transaction (investment) price may provide the best indication of value.

Our professionals provide independent value opinions for compliance with IRC 409A, as well as the comparable financial reporting standard FASB ASC 718. We have experience providing value opinions for pre-revenue companies as well as revenue producing enterprises in a wide range of industries.

For more information, please see the service sheet and other related service pages listed to the right or contact one of the professionals listed below.

Equity Compensation Valuation Contacts

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