Section 409A and Section 83(B)

Section 409A and Section 83(B)

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Section 409A Compliance and Section 83(B) Elections

LBMC provides valuation services that help our clients navigate tax issues related to the issuance of share-based compensation to their employees. Two common events requiring an independent valuation are as follows:

  • A company issues stock options requiring compliance with tax regulations under Section 409A to establish the strike price for stock options that is greater than or equal to fair market value.
  • A company issues restricted stock and the employee receiving restricted stock desires to make a Section 83(b) election.

Valuation Safe Harbor Principles

  • The valuation is not more than 12 months old and is prepared by an independent appraiser.
  • The valuation takes into consideration all available information material to the value of the company.
  • The valuation is performed by a person that the corporation reasonably determines is "qualified."
  •  For startup companies with operating histories less than 10 years, the presumption of innocence will not apply to the valuation if the company or the recipient of the benefit may reasonably anticipate that the company will undergo a liquidity event within 90 days or make a public offering within 180 days.

Specific Valuation Challenges

  • Volatility of results – Early-stage companies typically experience significant changes over shorter periods of time that materially impact value.
  • Complex capital structure – Early stage companies have capital structures consisting of common stock and several classes of preferred stock, each with different liquidation preferences and participation rights.
  • Exit scenario considerations – These include IPO, strategic sale, operating independently for an extended period and failing to develop a viable business.

Engagement Options

Valuation theory is comprised of three primary approaches to value - the income approach, the market approach, and the asset approach. LBMC complies with valuation standards set forth by the American Institute of Certified Public Accountants. Those valuation standards allow us to perform two types of engagements described as follows:

A valuation engagement is broadest in scope and requires the valuation analyst to consider all of the valuation approaches and methods deemed appropriate given the subject company’s circumstances. The result of a valuation engagement is expressed as a conclusion of value.

A calculation engagement is narrower in scope than a valuation engagement and allows the valuation analyst and client to limit the extent of procedures the valuation analyst will perform in the process of calculating the value of a subject interest. The result of a calculation is expressed as a calculated value.

The benefit of a calculation engagement is that it is less costly than a valuation engagement. The offsetting risk of a calculation engagement is that the Internal Revenue Service may challenge a calculated value to the extent that the valuation analyst cannot consider it a conclusion of value.

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