I’m often asked about where I go to get an independent 409A valuation for the common stock options of our portfolio companies.
This issue is very important because it greatly impacts founders and employees and there is increased scrutiny by the IRS and penalties over pricing common stock options at “fair market value”.
Whereas in the past the rule of thumb may have been to simply price common stock options at 10% of preferred value, I have seen ranges from 10%-25% based on independent valuation analyses, all over the map, depending on the stage of the company and its traction.
I recommend to our portfolio companies that they hire an independent firm to carry out an analysis and to do so anytime there is a new round of financing in which the preferred stock price changed or ideally at least once per year.
While hiring an independent firm to do this analysis while in bootstrap mode may not be an expense you want to incur, the issue is important enough and penalties significant enough that it is worth the cost to have some independent backup to your common stock pricing.
The effort to get the job done takes about 4-6 weeks and involves providing information that you probably already have for your fundraising activities – projections, cap table, customer pipeline, legal documents related to your latest financing etc. Once you get the information together, it is really not much of a burden.
I was referred to a company called Aranca, which does 409A valuations for hundreds of VCs in the Bay Area. I have used them several times now and their rates are very reasonable (we have paid <$5K). They are able to price cost effectively because their analysis team is out of India. I have found the quality of their work to be excellent. My contact there is Ravi Prakash (ravi.prakash at aranca dot com).
