The 409A valuation refers to an independent valuation of the common stock of the company. Getting a 409A valuation is needed to determine the option price being offered to employees. With it, there is no way for the company to sell those shares.
Before getting a 409A valuation, you might want to know how long it takes to get one. In general, it takes about two weeks for you to get a final draft of your 409A valuation for your Board to approve as long as you have all the items that are required. However, the time may take longer for later stage companies that have engaged an auditor.
As stated before, there are a number of items that are required to get a 409A valuation. If you have no idea about them, below is the list of all of them:
- Your sector or industry
- The newest amended articles of incorporation: This one is also called the corporate charter or certificate of incorporation. If you do not have this, your outside counsel will do.
- The newest cap table: Just like the newest amended articles of incorporation, your outside counsel will have this if you don’t.
- Board presentation and newest pitch deck: This one is only when you just completed a fundraise.
- Company historicals and 3-year profit and loss (P&L), cash balance, and debt projections: If your company is in the early stage, this is the best effort as predicting where the company will be in 12 months, much less three years is not easy.
- Estimate the amount of options you expect to issue over the next 12 months: The best back of the envelope estimate is to take the hiring plan and then multiply it by the median number of options per employee. It is really good to adjust for any option for expensive hires such as VP and C-level executives, Director of Engineering.
- A list of more than 5 publicly traded companies most comparable (trading comps) to yours: It is really fine if your company does not match to an exact category. In fact, most founders begin disruptive companies. That’s why it is not common to not fit well into the existing industry. However, it is still needed for you to make sure that the comps make sense to you because they will be part of your subsequent 409As. The time your comps should be changed is only if someone is acquired or if new companies go public that make sense to include.
- Timing expectations around potential liquidity events such as IPO and M&A
- A few significant events that have happened since your last 409A
The process of 409A valuation includes data collection and kick off calls, valuation modeling, preparation of draft schedules, and management review in the first two weeks, and then getting Board approval and granting options the third week.
After knowing how long it takes to get a 409A valuation, you might also want to know the other information about getting a 409A valuation. One of the things that you might want to know is the cost. How much do you think the 409A valuation costs?
The cost of the 409A valuation varies. The normal one should be anywhere from $1,000 to more than $5,000. For big corporations, it can reach more than $10,000. For the startups and Series A companies, it costs between $1,000 to $3,000. For bigger companies with multiple rounds of funding series (Series B and C), the cost can be anywhere from $3,000 to $5,000.
There are a few factors that might affect the cost of the 409A valuation, including:
- Size of company
One of the factors that affect the price of the 409A valuation is the size of the company. Basically, the smaller company is and the lesser complexity in the operations is. The bigger the company the more complex their operations would be. Remember that the actual cost can be determined when the evaluator gets the financial statements of the company to see the revenue earned, the assets owned, and the operation process.
- Company industry
Everyone knows that the company industry is the factor that affects the 409A valuation costs. In fact, the traditional businesses, including trading companies and the brick and mortar companies, cost less to get a valuation done. It is said that the operations of such companies are more simple and easier to predict the e earnings in the future. However, the specialized businesses, such as tech companies or fintech companies are less predictable.
Looking into the industry is a must. Besides, it is also important to understand its value, see how things are valued in the industry, and the value of the assets of the company. There is probably a product sold by a brick and mortar company, such as clothes. As there is something real that can be measured, it is easier to get the value for such a company. On the other hand, it would be harder to value the service based on knowledge and industry experience like tech companies with service or software products, increasing the cost of valuation.
- Age of company
The next factor that affects the 409A valuation cost is the age of the company. Contrary to the popular beliefs, the newer the company does not mean the cheaper it would be to get a 409A valuation. The main reason is because a new company does not have any stable operations going on, making it longer to forecast the sales of the company and get the value. However, there is a possibility for it to cost a bit more. Everything depends on the other factors that are involved.
As you can probably guess, the company would have already stable operations if it is much older. If it is the case, the evaluator may get a good time when predicting the future sales of the company as it may be easier to do so.