Assuming you have ever used stock options to reward members of your staff or have even discussed with prospective investors you may have heard the term 409A valuation. To quite a few founders, it appears to be a technical compliance mandate, one of those check boxes that allow you to keep your lawyers and accountants satisfied. However, here is the point, the 409A valuation methodology is not just a mere law requirement. When done appropriately, it not only secures your startup but also gives your team strength besides enhancing your long-term growth history. Let us take a bite of how this will be useful and the gains which are attached to it.

• Just to recap, what is a 409A valuation? The name derives out of the U.S. Internal Revenue Code in Section 409A. Simply, it incorporates that privately held companies gain an independent and third-party appraisal of their common stock preceding providing a stock option. The valuation makes the fair market value of such options. Why does this matter? Since otherwise, the IRS might contend that you have made options available at a discount, which would initiate unattractive tax sanctions on the employees. That is to say: no safe harbor no 409A. It is the methodology that makes this valuation acceptable, justifiable, and accurate. And that is where the actual benefits lie.
• Shields new businesses from tax and legal risks.: The agreeable will be the first thing to mention. An effective 409A valuation methodology approximation procedure will develop supportable market worth of your common stock in the trading organization. This secures the company and the employees in case they are victimized by the IRS. In case you decided to give an appraisal yourself, or choose a random figure, you would run a significant risk of harsh punishment. Through an effective methodology, which can be income methodology, market methodology and asset-based methodology, you develop a barrier to such risks. This is an enormous amount of peace of mind to the founder of the humanity. You are not in the position to have your first hire in engineering hit with capitalize taxes due to poor documentations. The ensured way that can make sure that does not happen is to have a defensible 409A valuation.
• Increases Employee Trust: A large portion of startup compensation is in the form of stock options. They are what persuades good individuals to enter a relatively new company than pursuing a safer, more well-compensated corporate position. However, the choices must have any meaning; the employees must have an assurance of being priced. It is here that the methodological 409A comes in. A qualified third-party 409a valuation report helps your staff to know that their equity was not puffed up or down on behalf of agents of a third party. It informs them: “It is not arbitrary that the founders must have drawn out of the air and given the number 0. Such trust would have a tremendous difference in retention and morale. 
• Establishes the Framework for Fundraising: After you sit before investors, one of the things they will inevitably seek to get are your cap table and options prices. An already prepared solid and defensible 409A valuation demonstrates that you intend compliance and are a disciplined financial person. It is also a way of avoiding fumbling talks. Consider a situation where there is a pitch of Series A and you need to go in and realize that your option pricing has long overdue. This is a red flag to an investor who might be concerned with its future liabilities. Your continued maintenance of your valuation in your 409A sends the message: “We maintain a tight ship. And in fund-raise, that counts.
• Avoids Future Headaches from Dilution: A quite unrecognized advantage of 409A technique is that it avoids a channeling of misalignment between players in the early stages and workers who came there late. This is the case because: by pricing options too cheap without proper valuation, you will expose yourselves to the risk of providing equity on an artificially cheap basis. When new investors arrive, and learn of this, it may result in a renegotiation or repricing fiasco. On the other end, when you charge too much; you are likely to demotivate employees as they think their choices are pointless. The adequate 409A process of valuation balances the act. It provides the employees reasonable alternatives even as the company remains appealing to investors in future.
• Offers a Growth Benchmark: Every time there is a 409A valuation, it is a time and place of how your business progressed. Such valuations over time create a road map on how your business is progressing. Imagine that it is growth indicators on a wall chart. It is a good sign that you are going in the right direction when your valuation grows with each round. When it falls it could be an indication of strategy change. This may not only be inspiring to both founders and teams; it is essential when planning how to do exits or acieration in the future.
• Enhances Your Operations with Professionalism: Flexible startup companies are known to multi-task a millionth: fit to the product-market, acquisition of customers, runway. Obedience may be annoying. However, this is the reality here, professional operations form some of what makes the difference between those that are successful in the end of startups and those that ignite. Providing a stringent 409A valuation approach, you are demonstrating that your organization takes the issue of governance seriously. Professionalism offers confidence not only to employees and shareholders, but also to more acquirers in the future.

The 409A valuation is an aspect that has become like a box to be ticked by many founders. However, as you dig deeper, there are much greater advantages to the methodology on top of compliance. Business valuation services defend your business against risk, creates trust with your employees, makes smarter decisions, and empowers your long-term growth story. Check 409A valuation is not the thing to be thrown away in case you are a startup. Embrace it as a tool. Understand what is valued in you, and leverage it to develop strategy. Ultimately, 409A methodology of valuation is not only defensive, on one hand, with the IRS, but offensive on your future, on the other.