Alteris LLC helps companies fulfill the valuation requirements of Section 409A of the Internal Revenue Code regarding stock options and other forms of deferred compensation.
Internal Revenue Code Section 409A was enacted by Congress in the American Jobs Creation Act of 2004 on October 22, 2004. It is intended to prevent perceived abuses by executives and corporations in the issuance of deferred compensation. Private companies are required to follow more stringent guidelines when issuing stock options and other forms of non-qualified deferred compensation.
Privately held companies have historically relied on the expertise of board members and management to determine the price at which stock is granted to employees. IRC 409A will have significant impact on the methods and processes used to determine stock prices for these privately held companies.
The consequences of failing to comply with these regulations can be substantial. Noncompliance can lead to acceleration of taxable income, penalty taxes, company withholding tax issues and potential exposure for board members.
In particular, there is a significant potential tax liability for the recipients (i.e. employees) of equity compensation if the price at which the compensation was granted is below fair market value at the time of the grant. These tax consequences have a direct impact on the individual and can include a 20% tax in addition to employment and income taxes, taxation at the time of vesting rather than at the date of exercise and potential interest charges.
IRC 409A may also impact other shareholders and prospective buyers of equity. It has cascading consequences for companies considering a possible sale. For example, a buyer may require special representations and warranties from the target company with respect to the compliance with IRC 409A. Other equity investors such as venture capitalists, angels or private equity firms are also impacted by the requirements of IRC 409A as they can hold equity with different preferences and are sensitive to dilution and their performance of their fund.
In other words, non-compliance could impact the marketability of a business to investors and/or acquirers. By obtaining a fair market valuation from a qualified independent appraiser companies automatically qualify for a “safe harbor,” shifting the burden of proof regarding the soundness of the valuation to the IRS.
Our market knowledge and experience in valuing diverse businesses makes us the perfect independent appraiser to assist you in satisfying these new IRS regulations.
How We Do It
Our certified valuators determine the fair market value of the common stock for 409A compliance using methodologies based on NACVA valuation standards and the IRS requirement to consider “all relevant facts and circumstances.” These include asset-based, income and market-based approaches to determine the enterprise value of a company. This enterprise value is then allocated to the various classes of stock, taking into consideration all the rights and preferences of the preferred issues, resulting in a value of the common stock.
Our valuation process considers multiple aspects of the company such as its operations, projections, competitive environment, capitalization structure and others. We generate a cohesive report that details the analysis, assumptions as well as factors and methodologies used.
