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How to get valuation for options?

We're a pre-rev company and are getting ready to issue our first options. To do so, we need a company valuation. I want to spend as little as possible on the valuation without creating future IRS issues. Any thoughts on a cheap way to get a valuation on an early stage company?

8 Replies

Jon Brilliant
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Jon Brilliant Advisor
CFO, Bigfoot Biomedical, Inc.
Doug, If you have issued common stock to investors, you need to use that, but if you haven't then if you have expertise on your board, that person can provide an opinion to the board based on her experience and market research. You can reach me at [removed to protect privacy] if you have further questions. Jon
Michael Weickert
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♦ Strategic & Entrepreneurial Executive ♦ Trail-blazing leadership in biotech, medical device & pharmaceutical business
How cheap is cheap? You can get an independent 409A valuation for $3-5k. It may be worth it if it saves you from future issues. We used Cabrillo Advisors most recently.

If you have investors, then you have an independent post-money valuation and need to discount the common stock portion of the valuation based principally on the preferences of the preferred stock.
Douglas Tarr
0
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Douglas Tarr Entrepreneur • Advisor
Entrepreneur and Software Architect
We used preferred return, it was approx 2K and took about a week.
Jeff Chang
4
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Jeff Chang Entrepreneur • Advisor
Startup Guy, ER Radiologist & Hunting for AI
We use eShares Inc. -- https://www.esharesinc.com/ -- they provide a subscription-based 409A valuation for $159 per month -- includes a new valuation every 6 months, as required if you're issuing options regularly. It works out to be much less expensive than the other providers out there -- and they've got an awesome real-time online cap table solution for your investors as well, which is included for free.

The 409A valuation took a while longer than expected, and an email got lost along the way -- I think they've had a bit more volume than expected lately -- but our first 409A valuation report looks good, and it's hard to beat $159 per month : )
Steve Owens
0
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Steve Owens Entrepreneur • Advisor
Finish Line - A Better Way for Small Companies to Develop Products
Do not give a valuation, just give a discount to a future valuation (say the Series A). Steve Owens - Finish Line PDS A Better Way for Small Companies to Develop Products e | Steve.Owens@FinishLinePDS.com p | 603 880 8484 w | www.FinishLinePDS.com 94 River Rd | Hudson, NH | 03051 Click for Product Development White Papers ---- On Thu, 27 Nov 2014 11:32:58 -0500 Doug Calahan<[removed to protect privacy]> wrote ---- FD:Discuss New Discussion on How to get valuation for options? Started by Doug Calahan Founder, CEO, Local Roots. Previously CEO Argo Systems. Duke grad. We're a pre-rev company and are getting ready to issue our first options. To do so, we need a company valuation. I want to spend as little as possible on the valuation without creating future IRS issues. Any thoughts on a cheap way to get a valuation on an early stage company? FOLLOW DISCUSSION or Reply Directly to this email to participate in the discussion Manage your email notifications
Michael Rothrock
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Michael Rothrock Entrepreneur
Chief Platform Officer @MaxPlay
Agree with Steve--the easiest way to do this is to model the options after a convertible note. Instead of offering a valuation today, simply offer them at a discount from your first funding round when that materializes.

Note the one downside to this is that savvy employees may realize that it is in their financial interest to have a lower valuation at time of conversion. If you have unscrupulous employees who are in a position to influence this, then you have bigger problems, but it's something to keep in mind.
Rob Gropper
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Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
Doug; a few more details would be helpful (you say pre-revenue, but do you have customers/users? do you have a product released? have you taken any investment yet - friends and family? . At this early stage the valuation number doesn't have to be generated from an overly sophisticated process. You are primarily looking to pin a number on the valuation that you can rationalized now and down the road with the IRS and investors. If you had to sell the company tomorrow, what would someone pay for it? If you don't yet have customers or infrastructure or patents, or servers, etc. then likely not much thus:
1. as Jon mentioned, if you have recently issued stock then use that valuation
2. if you haven't yet issues stock, but you have invested some cash then use that number.

Daniel Gonzales
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Daniel Gonzales Entrepreneur
The Law Office of Dan Gonzales
If you're discounting a future valuation and want to avoid IRS problems, have a plan for IRC 83(a) to avoid immediate income inclusion to the employee. ie. discounts should be non-transferable and subject to a substantial risk of forfeiture.

409A and its Regulations have safe-harbors for valuing options, it is the place to start reading.
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