409a valuations

Jerry:

I have been CFO of a couple of companies in the post-409a era and the board looked straight at me each time. Well, they glanced at outside counsel who told them to make sure it happened and that it is well-documented, etc., but after that they just expect CFOs to run it.

I find most are doing quick and inexpensive (if you call $7,500 inexpensive - but it's less than it used to be) third party valuations b/c who wants to be solely responsible when the IRS and employees are concerned?

There are reasonably well established procedures and standards for doing the valuation and any decent firm will do them (I'll put in a plug for Teknos Associates here - I used them at my last company and they were inexpensive and very good). What you will find are valuations based on comps/multiples and DCF are the norm - often using a combination.

Interestingly, the valuation companies do many of these a week and they lean heavily on the CFO for raw materials and guidance. I find that leaves the CFO in the drivers seat to some extent b/c they often provide the very model that the valuation firm will use to run their analysis. The firms are also open to discussion when it comes to all of the discounts applied to the DCF and the companies included in the multiples discussion.

What all of that means is that the CFO can effect the valuation greatly. And what you should do up front, before even engaging the provider, is to get a feel for what the board expects the outcome to be. If they think (based on whatever they're thinking) that the valuation should be $.08/share and your valuation providers comes up with $1.35, you're in trouble. Get ahead of that and bring the valuations together (metaphorically speaking). This will help you reduce surprises and rework.

I generally agree with John. First, 409a is not an option and the board just asks the CFO to "take care of it". Second, I certainly don't want the liability down the road when there are so many practitioners around and the process is so well established. Yes it's annoying to have to do it in the first place because the entire exercise seems futile (as you note in your second post), but what can you do...

That said, there are better and worse valuation providers out there so make sure you find one with a good rep (just ask the group on Proformative - lots of experience on this board).

Should definitely have the work done. The silver lining right now at least is that many valuations firms are looking for work. I recently received a quote from the firm that we historically had used and thought it was too high. Went out to bid with 3 firms and a very tight turn around. Cut the cost by more than half.

Agree with the emerging consensus - i.e. use a 3rd party valuation firm to validate your findings. One method would be to do the valuation yourself and then use the valuation firm to validate your process and assumptions.

An interesting thought is that if the Company is out seeking new funds and has a termsheet out with valuation figures (or has recently received funds at a high valuation), that factor could season the stew.