5 factors that determine the cost of 409A valuations

LTSE Team

Getting a 409A valuation can often feel like a black box for many founders. It involves many complicated processes requiring qualified individuals with specialized knowledge and expertise. Since obtaining a 409A valuation is critical for startups that plan to offer equity-based compensation or raise funding, maneuvering these processes can easily overwhelm founders. 

The solution is to find the right 409A partner to help ease the process.

But picking the correct one that suits your business comes with several considerations. In this article, we’ll explore the role of 409A valuators, what to look for when picking one, the cost of it, and key considerations to remember that can influence the 409A valuation cost. 

What does a 409A valuator do?

  1. 409A valuators create a 409A valuation report to establish the fair market value (FMV) of a private company’s common share. 
  2. Once they receive a report request, these service providers assign a team of analysts to assess the company’s value by reviewing its financial information. 
  3. Since the 409A valuation processes can be complicated, the valuators act as consultants, offering  their support and expertise.
  4. Additionally, they assist in maintaining accurate and up-to-date records to ensure compliance with IRS’s legal requirements

What to look for when selecting the right 409A valuator

Hiring the right third-party 409A evaluator can be tricky. With an abundance of them, selecting one that’s reputable and suits your startup is critical. This ensures you get the best 409A valuation report that complies with IRS regulations and requirements. Here are some key factors to consider when selecting a 409A valuation partner.

Industry reputation

When selecting a 409A valuation partner, it’s important to pick one with a solid industry reputation. You can assess their reputation through media analysis, stakeholder surveys, focus groups, and more. The key is to choose a provider with a long history of completing high-quality, independent appraisals, as there’ll be a high chance the IRS knows them. In fact, such providers will probably be in the government’s good books, thus having a greater chance of securing a safe harbor 409A valuation for your startup. That said, make sure to pick a valuator with proper credentials from the National Association of Certified Valuators and Analysts.  

Audit-readiness 

A good 409A valuation should withstand the intense interrogation of the IRS. This means that your valuation partner should have a solid track record of clients who have successfully defended their 409A in front of the IRS, the Big Four, and the SEC. Of course, no firm is perfect but pick one that’s at least pretty close. The partner should also agree to defend your valuations against audits for an unlimited period of time. 

Price

As founders, we understand how stressful it can be to get a solid 409A valuation without making a hole in your funds. Though the average 409A valuation price has declined over the years, it could still cost, on average $1,000 to over $5,000 (or even $10,000 for large corporations). Again, the price largely varies depending on your startup’s size and complexity. This is why it’s crucial to pick a valuation partner that offers both cost-effective and high-quality, accurate reports.

Domain expertise

Go with a 409A valuation service provider with experience valuing your industry. There are plenty of valuation partners out there focusing on different types of startups in different industries. As such, it’s vital to pick a provider that is familiar with and has experience with your industry and unique funding experience. For example, if you are a high-growth startup, it’s not a good idea to pick a firm with mostly clients from profitable small businesses.

How much does a 409A valuation cost?

The 409A valuation cost greatly varies, depending on the provider and the service agreement. Generally, they can cost between $1,000 and $5,000. But as your startup receives multiple rounds of funding and moves to Series A, B, or C companies, the valuation cost also increases. Besides, the company’s industry can also affect the price of a 409A valuation.   

Factors that determine a 409A valuation cost

No two 409A valuations are the same. Their scope and cost can vary significantly based on the startup’s specific situation. Here are five factors that determine the 409A valuation cost:

  1. Stage of the company

    It’s important to look at your company's stage before determining the 409A price. This is because every company stage has a different number of shareholders, assets, and overall value. This plays a role in establishing the cost of the 409A. For instance, if your company just started with a seed funding round, valuing the company is expected to be less expensive than it will be further down the line as it matures and grows.

    However, as your company grows with each funding round, other stocks and equity options become available. This then pushes the 409A valuation cost higher, given that the efforts and calculation intensify. 
  2. Size of the company

    Knowing the size of the company, particularly how many employees the company has, also plays a role in determining the cost of 409A. Generally, smaller businesses with less complex operations are less costly to value than larger companies. However, once a company starts to grow and its operations become more complicated, the 409A valuation process becomes more complex, which increases the valuation cost.

    But remember that this is just a rough idea of how company size affects the 409A price. Once the evaluator gets hold of the company’s financial statements to see the revenue earned, the assets owned, and the operation process, they can establish the actual 409A cost.
  3. Complexity of share structure

    A startup with a simple share structure means it has one kind of equity class, and only common shares are issued. This is common for newly formed companies with a small number of founders and employees. As the company grows, the share structure becomes more complex. They will issue warrants, employee options, preferred shares, and more. 

    As such, it gets tougher to determine an accurate valuation. Due to the complexity of the company’s share structure, this may contribute to a higher 409A valuation cost.
  4. Industry of the company

    This is an obvious factor that can affect the 409A valuation price. Traditional businesses like shipping and brick-and-mortar companies typically pay less to get their valuation done. Their operations and tangible items are more straightforward in forecasting their future earnings. 

    However, specialized businesses like fintech companies are less predictable. Generally, tech companies offer niche services or software products, and valuing these services based on industry knowledge and expertise takes more time and effort. As a result, the 409A valuation cost is higher.
  5. Age of the company

    One might think it would be cheaper to get a 409A valuation for a new company, but it turns out the opposite is true. Since a new company does not have a track record of stable operations, it takes longer to predict its sales and assess a value. As a result, it can cost early-stage founders more than they might expect to get their 409A valuation done.

    On the other hand, older companies tend to have more stable operations in place. This can make it easier for the valuator to forecast the company's future sales, reducing the 409A price.

Getting a 409A valuation can be a complex and overwhelming process for founders. However, finding the right 409A partner can help ease the process and ensure that startups obtain an accurate and compliant valuation report.

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Disclaimer
The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Information about the company is provided by the company, or comes from the companies’ public filings and is not independently verified by LTSE. Neither LTSE nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding LTSE-listed companies are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. Advice from a securities professional is strongly advised.
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