Ways to Value Shares of Private Company

Are you an entrepreneur with a dream to start a groundbreaking company? Get prepared for a bumpy ride. There will be many twists and turns on the road to making your dream a reality, and you'll need all the help you can get. A 409A valuation of shares of private company is like a signpost on your journey, providing useful information about where you are and how far you still have to go. There are three approaches to choose from, each impacting the cost of your 409A valuation and determining who can do valuation of shares of a private limited company.

valuation of shares of private company

Do it yourself

Short-term, performing the 409A valuation of shares of private company in-house is generally more cost-efficient than using an outside service. You'll also have more control over the outcome of the process. If you're interested in keeping strike prices down, this provides an opportunity to lowball the FMV, although you may not feel inclined to do so. If you choose to not have a professional do your 409A valuation, you need to be aware that you will not have the same protections in place in the event of an IRS audit. The government takes understated Fair Market Values very seriously, and if you are not confident in your abilities to produce an accurate valuation, the consequences could be severe.

The best way to determine the likelihood of a challenge by the IRS is to get a 409A valuation done by an independent firm. This will help you avoid any potential trouble with the IRS and give you peace of mind. Depending on your company’s age and industry, the valuation may cost less than you think. Contact a professional firm to find out.

Use a Software Tool

There are a few different ways to value your company for a 409A. You can use an online 409A valuation tool, or if your company is small or young enough, you may be able to find these tools for free. However, using a 409A software tool doesn't meet the qualifications for safe harbor presumptions. Appraisal tools for startup corporations are more popular during the early days when:

  • Your raised amount is between $500,000 and $1,000,000.
  • You have common stock, and non-convertible debt.
  • Your trading of Common stock is yet to begin.
  • You are not able to anticipate a change within 90 days or an IPO within 180 days.

Use an Outside Firm

Although it may be the costliest solution upfront, paying for a 409A valuation of shares of private company from an independent and reputable firm can actually save you more money in the long run than if you were to fail to achieve a safe harbor valuation and have to pay to correct your mistakes. An independent firm can help you achieve a safe harbor valuation quickly and easily, typically completing your appraisal in under a month for a reasonable price.

A 409A valuation doesn't have to be expensive, even for a startup that doesn't have a lot of money. You can save time and money by using a company that partners with your cap table software provider to make it easy to share equity data. It's worth choosing a company with a good reputation and a great track record that will support you if you're audited.