Just raise a round? Don't make this common mistake.

Posted by  Dustin Byington   on May 29 2021

When was the last time you valued your common stock? 

 

If you are giving out stock options to your employees & advisors... and you have not run a valuation... you are likely not in compliance. 

 

Many founders do not realize the IRS requires companies value their common stock:

 

+ after every capital raise

+ every 12 months

 

Non-compliance can result in serious penalties from the IRS & SEC for holders of common stock and options. 

 

What's going on? Why do they care? 

 

When you give out stock or options you are providing payment for services. The IRS doesn't care if you are paying someone cash or stock... they want their cut. 

 

The 409a puts a value on your common stock and helps the IRS determine how much value you just gave for services, and therefore how much to tax the common stockholders. 

 

This number is usually discounted significantly from the price your investors are paying due to the fact that the securities are illiquid and can't be easily sold. So usually the number, along with the tax burden to recipients, is quite low. 

 

One of the reasons companies give out options instead of common stock is that it can reduce this tax burden even further. By placing the strike price of the option at or above the 409a value you haven't actually given your employees anything of value.

 

Let me explain: 

 

Let's say the 409a price comes in at $0.001/share. You place the strike price of your options at $0.001. Therefore all you've done is give your employees an option to buy shares at the current value. This is not a taxable event. 

 

It might be easier to see through the lens of a publicly traded stock. If Google is trading at $500/share and gives their employees the ability to buy shares for $500 then they haven't given them anything of value... today. And therefore, it is not a taxable event.  

 

If you need to run a 409a, TWO12 is here to help. 

 

We allow you to run your 409a with a click of a mouse (going with a traditional provider can take you 4+ phone calls and 14+ emails)

 

We provide transparent, à la carte, and affordable pricing (don't waste $10,000 on an overpriced cap table bundle with 409a thrown in). 

 

Our solutions start at $1,500 for pre-seed, seed, and Series A companies. Run them whenever you need them, get in compliance without wasting money, and get back to dominating your market. 

 

You can find more information on our 409a Valuations here: https://www.two12.co/409a