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Stock Options and 409A Valuations in the Private Sector

Stock Options and 409A Valuations in the Private Sector

March 23, 2022 at 11:46 AM - 409A Valuation,

Stock options can serve as an important tool for attracting new talent to your company and retaining top-quality employees or consultants. To avoid tax surprises and penalties, however, options must be issued at exercise prices set at the then-current value of the company’s stock. Although publicly-traded companies can easily determine this value, a private company has no readily available source for the current value, and therefore, must determine the fair market value of the company’s stock pursuant to Section 409(A) of the Internal Revenue Code (IRC) – hence the name “409(A) Valuation.” Despite the complexity which the term “409(A) valuation” suggests, it is not mandatory that a company engage a valuation company to perform the valuation. And if your company is a start-up with limited assets and no income, you may justifiably wonder if procuring a formal valuation is worthwhile. In fact, a company can comply with Section 409(A) without engaging a third-party valuation expert; this approach, however, is not risk-free.

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