409A · Valuation

Good firm to do 409a valuation?

Zachary Stewart Founder at SwoopRide.com

May 19th, 2015

I've read the two other threads regarding 409A valuations. There are two questions I'm still looking for guidance on.

1) Do you have recommendations of a good firm to use for a 409a valuation of a illiquid corporation? What was the cost? It seams that the price of a valuation was coming down in 2013, I'm wondering if Ican afford to do this on my own dime, pre-funding, in order to lock in the best valuation for my first hire.

2) Mine is an illiquid corporation with no customers, no patents, no investors, no nothing except my own experience in the subject matter, big plans, and some code that I happen to think is really slick. It's been years since I formed the corporation, and all of my shares have vested (par value strike price). Would it be safe to say we're STILL at or near par value? Or is there more value to the company even though we don't quite have anything solid yet?

Anonymous

May 19th, 2015

Hey Zach - I've worked with Scalar and it cost $2500, which I was told was about standard. We had just done a $2m seed, so there was more info to go off of than you have now but the truth is they almost always at early stages get very close to the valuation in your last round.  Can make an intro if that helps. A 409A is basically a CYA for boards and don't actually have to be followed when pricing options, but everyone does because it's safer to have a 3rd party give the number.  In short, not sure you need to spend those sort of dollars just yet. 

Peter Weiss President at American Outlook, Inc.

May 20th, 2015

Why are you doing a valuation?  409(a) is principally used to justify the strike price on stock options because there are tax implications if you underprice them.  If you are raising money your valuation will be a result of the negotiation with the investor.  If you're trying to hire someone and want to issue options given the way you've described the company you can probably use any reasonable value the parties agree on and save the valuation fee.

409(a) allows the company to do its own valuation if you meet a few criteria including being less than ten years old, having the analysis done by a competent professional (the regs are not specific on this but if you have a CFO or VP-Finance with lots of experience and/or professional credentials it is probably fine) and a few others.  

If you decide you really need an outside valuation the prices mentioned above are in line.

Peter Weiss President at American Outlook, Inc.

May 20th, 2015

Who is getting the shares and why?  

Ken Marshall

May 19th, 2015

I'd suggest Scott Lockart at Tower59.com. Great team, fast, responsive, good deliverables... everything you're looking for to do this work. Cost isn't nearly as much as you'd think (at least with Scott's team). Probably your best bet is just calling Scott and asking him questions 1 & 2 above, but I can vouch for the work quality and affordability.


Tim Sullivan CEO at Oceanic Partners, Inc.

May 19th, 2015

I’ve found the following resource to be fairly priced as well as experienced and timely: Josette C. Ferrer, Managing Director Clairent Advisors LLC 201 Spear Street, Suite 1100; San Francisco, CA 94105 415 658 5589 | Fax 415 871 2618 | Cell 415 272 5191 jferrer@clairent.com | www.clairent.com

Chris Murphy Director of Corporate and Legal Affairs at E2open

May 19th, 2015

If you will need valuations regularly, and most likely you will, you should definitely at least consider eShares 409A as a service option.  https://www.esharesinc.com  

Richard Liang CEO, Founder at Preo

May 19th, 2015

Like, Ray, we've also worked with Scalar with a cost of $2,500. We got quotes from a few other companies who were significantly higher. In thinking about valuation, you're essentially hiring a professional to ask you pertinent questions about your business that will help them calculate the value of your company. 

This is all based on financials (income statement and balance sheet) and founder projections for revenue & net income. The valuation firm will take your numbers and run several types of analysis to get to a weighted average valuation for your company. For your company specifically, the biggest factor will likely be the cash that you've invested, and your projections of revenue & profits (timing of when this cash will hit the bank is a factor as well). 

At the end of the day, a valuation firm is much like have a VC associate ask you questions to build a valuation model on your company -- however, instead of challenging all of your assumptions & discounting anything you say by 80%, the valuation firm will take what you say as face value, and build you a very nice looking set of tables that you can now use as valuation for your option pool. 

Geoffrey CBV Manager, Valuations and Business Modelling at EY

May 19th, 2015

As Richard said, a valuation firm will take what you have said at face value and then will chose an appropriate discount rate that reflects the risk of achieving those projections. Choosing that discount rate in the context of an illiquid, non-profitable company is absolutely not a science. In a very early company with no revenue, no customers, no IP and no tangible assets, it is quite possible that a discount rate of 80% is appropriate. There is not much to work with from the perspective of a professional valuator.

Zachary Stewart Founder at SwoopRide.com

May 20th, 2015

Thanks everyone, very helpful!  Several sources are telling me it's pretty reasonable to make up my own valuation in this illiquid situation, but personally, I'm probably not qualified to do so (and I'm the only one here).  Perhaps I could estimate conservatively high? 

However, a restricted stock purchase agreement with buyback clause is also looking like a good option.  The shares still need a price though, so I'm not sure why it seams that no valuation seams to be required for this method.  Anyone have experience with this method?

Benjamin Olding Co-founder, Board Member at Jana

May 21st, 2015

We use Scalar.  They are fine.  This is a cya exercise; it has no meaning apart from the SEC.  Investors certainly don't care about their opinion of stock value.  You should not be stressing about this at your stage.  You should not be spending money on this.  Don't go talking to a valuation firm's salesperson - their job is to sell you a valuation.

The way you would get "in trouble" is that, years from now, someone at the SEC (not even IRS!) would come back and try to tell your option-holder they owe a small amount of back taxes because the discount you set was not quite right, years before liquidity.  I've never heard of this happening.  I'd expect you'd have to royally and personally piss someone off to have anyone look at this and even then, the only situation your lawyer couldn't get you out of would likely be if you set the strike price to $0.  When you raise your next multimillion dollar round, spend a few grand to get someone else to set the discount at that point (and only at that point).

Typically, a company like Scalar accepts the preferred price investors paid as the true value of preferred and then calculates the discount of common.  We didn't use them for our priced seed round, but just set the common strike price as 10% of our preferred price.  Years later, at our series A, Scalar recommended we increase it to around 20-25% of preferred, if I remember correctly.

Do you not have a concept of preferred stock yet because you have not had a priced round?  Find a friend who you think is or was at a similar stage who did a priced round and use his or her pre-money valuation.  If there's some reason you know why you couldn't get an investment right now, add a discount for that fact.  Divide by the total number of shares on a fully diluted basis (i.e. current shares outstanding plus warrants plus option pool) - there's a good faith swag at the preferred price per share.  Apply a very aggressive discount (minimum 80-90%).  There is a good faith estimate of your common strike price.  Go get a beer: you've thought about this too much already.

Also, just as an aside, if you haven't had a priced round yet, you're not vested: you're the owner.  A vesting  schedule is meaningless without partners: when you do a priced round, expect the investors to ask you to start a new vesting schedule (and do not object: that's a reasonable request; negotiate on how much you need to vest - try for 75-80%).