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IRC §409a governs all private companies in the U.S. seeking to issue deferred compensation, which generally includes stock options. The IRC does not allow the issuance of a stock option with an exercise price below the fair market value or in-the-money options. Tax penalties related to non-compliance are severe since both state and federal penalties are applicable. In addition, non-compliance may have a detrimental effect on a company’s eligibility to seek institutional financing or potential exit strategies.

The process involves determining the fair value of the company, allocating the equity value among different classes of shares and options, and using a relevant model to determine the fair value of the option. The Black Scholes Merton model is the most commonly used model to determine the fair value of the stock option.

We specialize in valuations under IRC §409a, and we provide the best quality and cost-effective §409a compliant valuations.