What is IRC 409A?

• IRC 409A is a section of the Internal Revenue Code that regulates the taxation of nonqualified deferred compensation, which includes stock options, stock appreciation rights, phantom stock, and other forms of deferred compensation that are not subject to the rules of qualified plans.
• IRC 409A was enacted in 2004 to prevent the abuse of deferred compensation arrangements that allowed executives and other highly compensated employees to defer income and avoid taxes.
• IRC 409A requires that deferred compensation arrangements meet certain requirements regarding the timing of deferral elections, the timing and form of payments, and the prohibition of acceleration or modification of payments.
• IRC 409A also imposes strict penalties for noncompliance, including a 20% additional tax, interest, and potential penalties on the employee who receives the deferred compensation.

What is a 409A valuation?

• A 409A valuation is an independent appraisal of the fair market value of a company's common stock, which is used to determine the exercise price of stock options and other forms of equity compensation that are subject to IRC 409A.
• A 409A valuation is required to ensure that the exercise price of stock options and other equity compensation is not less than the fair market value of the common stock at the time of grant, otherwise the options or equity compensation will be considered deferred compensation and subject to IRC 409A.
• A 409A valuation is typically performed by a qualified appraiser who follows the guidelines and methodologies prescribed by the IRS and the American Institute of Certified Public Accountants (AICPA).
• A 409A valuation is generally valid for 12 months, unless there is a material change in the company's business, financial condition, or capital structure that affects the value of the common stock.

Why do I need a 409A valuation?

• You need a 409A valuation if you are a private company that grants stock options or other forms of equity compensation to your employees, consultants, advisors, or directors.
• You need a 409A valuation to avoid the risk of violating IRC 409A and triggering adverse tax consequences for your employees and your company.
• You need a 409A valuation to establish a reasonable and defensible exercise price for your stock options and other equity compensation, which can also enhance the attractiveness and retention of your talent.
• You need a 409A valuation to comply with the reporting and disclosure requirements of the IRS and other regulatory agencies.

How do I get a 409A valuation?

• You can get a 409A valuation by hiring a qualified appraiser who has the experience and expertise in valuing private companies and equity compensation.
• You can get a 409A valuation by providing the appraiser with the relevant information and documents about your company, such as financial statements, capitalization table, business plan, industry analysis, comparable transactions, and other relevant data.
• You can get a 409A valuation by reviewing and approving the valuation report prepared by the appraiser, which should include a detailed description of the valuation methodology, assumptions, inputs, and results.
• You can get a 409A valuation by updating the valuation periodically, at least once every 12 months, or more frequently if there are material changes in your company's value.