Forums: Discussions for entrepreneurs and small business.

My company has recently passed an options incentive plan (this was done by our lawyers). However, before we can give options, we will need to have a fair market value for common stock in order to be kosher with the IRS. Problem is, we don`t have the budget to pay for a third party to give us a valuation.

Can anyone help with the process so that I can run a valuation myself? We are a simple web based business without complex revenues.

Thanks



-------------------------

www.MakeMeSustainable.com

I guess you’re facing a real dilemma here.

First of all, it will be extremely difficult to determine the fair market value of your common stock as required under SFAS 123R and Internal Revenue Code section 409A, because there isn’t a secondary market for securities of private companies.

The point I am trying to make is that if you can’t sell securities in your company freely, why would anybody believe that there is a fair market value for your securities.

Notwithstanding state and federal securities laws, the IRS of course is interested in putting a sticker price on this type of benefits so the beneficiaries can be taxed accordingly.

Having said that, you do have a few options:

•    If you recently sold shares in your company (common or preferred) to a third party, such as an investor, you can use the terms of this deal to establish a tentative valuation of your company and thus put a value on your outstanding stock.
•    If this isn’t the case, the only other option you have is doing a valuation of your company. Well, there are many different ways to put a value on a company ranging from Discounted Cash Flow (DCF) analysis, evaluating companies that are very similar to yours, looking at multiples, and asset based valuation techniques.
•    As far as I know, there are also special procedures available to illiquid start-up companies.

Of course the fee of doing a proper valuation that will be accepted for IRS purposes can vary immensely. However, I am assuming that you are probably a development or growth stage company with some revenues and assets and thus getting this done doesn’t have to be expensive.

If you are interested in sharing a few specifics, please PM me and I am sure we can help you with that.

I hope this helps.


Mark

 






-------------------------


Jackson Steiner
http://www.JacksonSteiner.com

Advanced Document Design for entrepreneurs, intermediaries, and the financial services industry.
http://www.Publications.FastVentures.com