Company Valuations and Common Share Valuations (Section 409A)

WHAT IS SECTION 409A OF THE IRC?
Section 409A was enacted as part of the American Jobs Creation Act of 2004 to curb abuses in executive compensation. 
The company is exposed to severe penalties of non-compliance upon granting ESOP with a strike price less than the fair market value of the stock price on the grant date.

WHO SHOULD BE CONCERNED ABOUT 409A?
Section 409A applies to non-qualified deferred compensation plans such as employee stock option plans (ESOP) and affects ESOs granted and vested after 31.12.2004. 
Although Section 409A exempts incentive stock options, if it is determined that the fair market value of the option price is greater than the strike price at the date of grant, the option will not be exempted from 409A.  Therefore, it is necessary to value the common stock price on the grant date of incentive stock options in addition to non-qualified ESOPs.

PENALTIES FOR NON-COMPLIANCE
Non-compliance will result in significant tax consequences to the company and option holder. These severe tax consequences include:

• Immediate taxation upon vesting of ESO
  
• Interest charge at the underpayment rate plus 1%
  
• 20% penalty tax in addition to the income tax
  

HOW IS THE VALUE OF A PRIVATE COMPANY DETERMINED?
Section 409A provides that fair market value is determined by the “reasonable application of a reasonable valuation method”. What is considered unreasonable? For example, to use a previously calculated value that fails to reflect all material information or, a calculation that is more than 12 months old. Our team of accredited valuation analysts, has extensive experience in valuing private companies, and has performed hundreds of valuations in all fields, from life sciences to internet companies.

HOW DO I COMPLY? 
CEOs and CFOs can avoid the implications of 409A by fixing the exercise price of existing ESOs. 
There are three levels of compliance:
Level A – contemporaneous third-party appraisal
Level B – retroactive third-party appraisal 
Level C – contemporaneous/retroactive related-party appraisal
Since performing an internal analysis of fair value is considered to be the least objective and the person performing the analysis, may or may not adhere to generally accepted valuation methods.  A trustworthy, experienced third-party appraiser is essential for the "peace of mind" of any enterprise.

S-CUBE YOUR PREFERRED APPRAISER
S-cube can help select the most appropriate model and establish appropriate inputs into the valuation process, regarding such issues as lack of marketability, cost of capital, control/minority interest, etc.
With years of extensive experience S-cube's team of professional advisors has performed hundreds of valuations for both private and public companies. Our advisors hold the Accredited Valuation Analyst (AVA) designation by the NACVA. NACVA's AVA and CVA are the only NCCA-accredited valuation credentials. We have gained the trust and confidence of the "big four" accounting firms and the appreciation of hundreds of satisfied customers. 
We offer the ultimate combination of professionalism together with experience and personalized service.