A 409A valuation is a valuation report for a private company's stock used to determine the fair market value of its common stock. This valuation is necessary for setting the exercise price of stock options issued to employees. 409A valuations are named after section 409A of the US Internal Revenue Code, which provides guidelines for valuing the stock of privately held companies.
"Safe harbor" status refers to the protection provided by the IRS to companies that comply with the requirements set forth in section 409A of the Internal Revenue Code. If a company's stock options are issued with an exercise price set at or above the fair market value of the underlying stock, as determined by a 409A valuation, the company is considered to have safe harbor status. This means that the IRS will not challenge the exercise price of the options and the employees will not be subject to additional taxes or penalties.
A 409A valuation can be performed by a qualified independent valuation firm with expertise in valuing private companies. The firm must have the necessary training, education, and experience to perform a defensible valuation of a private company. In addition, the valuation must comply with the guidelines set forth in section 409A of the Internal Revenue Code and take into account factors such as the company's financial performance, comparable transactions, and the current market conditions.
Value Buddy's qualified appraisers designed our methodologies and reports to exceed the rigorous guidelines set forth by Internal Revenue Code section 409A. We promise to stand behind our valuations in the case of an audit. We're also proud to say that our valuations have never failed an audit, even those performed by the IRS or Big 4 accounting firms.