We're an extremely cash-strapped startup that is in the process of raising an early seed round as well as bringing on two new advisors. The law firm we work with is urging us to secure a 409a valuation to determine the fair market value of our shares, but I'm curious if that is absolutely necessary at this point. We currently use Carta, but cannot afford the hefty price tag, and the same goes with every other resource I've seen. The last time we issued shares was one year ago, and while we've developed much in terms of customer discovery and some technology, we are still in the same place we were in then (pre-revenue). At the same time, I don't want the cost-prohibitiveness to keep us from making the prudent call. Would love ANY advice.
Do I *Really* Need a 409a Valuation at This Point?
Iynna·Dec 30, 2021Iynna·Dec 30, 2021Interesting! What is the law firm rationale for you having a 409a at this stage?I think you should definitely have an idea of your valuation as a company now and have a structured rationale as to why you have a particular number but I agree I don’t think it’s a MUST now. Now it might also depend on the type of company you are ie there’s a strong difference between a classic software enterprise vs a drug discovery or smth more capital intensive that you see in biotech for instance.
Hello! I raised $1mill across 2 seed rounds without a 409a and we also issued employee stock options after the 2nd round without a 409a. I can’t see why the law firm wants you to do a 409a to get the FMV of your shares at this stage unless it’s because you are about to issue stock options to new employees? Did they explain what the 409a is for? It’s not relevant for the seed round you’re raising (the valuation you raise on isn’t affected by FMV) but it is good practice to do it before issuing stock options… ahh maybe it’s for the advisory shares you’ll be issuing? From my understanding, the 409a is less about protecting yourself as a company and more about protecting the people who are receiving the stock options as they’ll pay tax on the FMV which comes from the 409a not the round valuation. We decided not to do it ourselves as we were cash strapped at the time, and legally you are actually allowed to determine your own FMV without a 409a (and if you are pre revenue it should be easy to give them a low valuation). Have a chat with your law firm and ask them if legally you CAN set your own FMV. They probably won’t be able to advise you how to do it as that will go outside their scope, but if they say it’s it’s legal then you can do a bit of research and come up with a figure (the aim with FMV is usually to keep it as low as possible for tax reasons).
Only do it if you are granting options to non-founder employees, IMO. Your lawyer should be able to come up with some structuring to give equity to the advisors without requiring the 409A. Keep in mind that your advisors should be aligned with your best interests, so they should be pretty flexible to do what's best for the company (and they shouldn't be expecting to get paid immediately anyway).Also, you might want to look into Pulley. It seems like their pricing keeps moving around, but right now it looks more affordable than Carta (pre-409A), especially since they let you group all of your sub $50k investors into fewer stakeholders on the cap table.
I was able to get a 409A valuation for free. I needed it when I started issuing options, rather than RSUs to employees.Not sure if the deal is still available, but it was either b/c our bank account is with First Republic and they had a deal, or it was a deal thru Captable.io. Sorry I can't recall exactly how I got there, but maybe start looking either with your bank or at Captable.io?
Actually, I think First Republic was offering my business a free 409A too, but it was with a different service (maybe Shareworks?). Could be worth switching banks to see who offers a free 409A if you really need one.
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