Continuing our detailed Q&A session with co-founders of intio, Dave and Alex share their expertise by answering the most commonly asked questions about 409A valuations.
Continuing our detailed Q&A session with co-founders of intio, Dave and Alex share their expertise by answering the most commonly asked questions about 409A valuations.
Alex: Generally, market factors determine what a startup is worth. Most commonly, when a startup raises money, there's some sort of pricing mechanism when they raise that money with the investor. For the purposes of 409A valuation, we will use that as the basis for value. On the other side of it, there are other comparable transactions, and companies, where you can impute valuation multiples and you can apply those multiples to the company that you're valuing. Then, based on a peer group of either companies or transactions, you can figure out roughly what the company should be worth.
Basically, it's market dynamics, and then within the market dynamic category you've got transactions and pricing mechanisms in the company. Pricing mechanisms like investments from investors or convertible notes with pricing mechanisms, such as SAFE caps or convertible note caps.
Dave: That's pretty comprehensive. At the highest level, private companies are just like public companies—just supply and demand. Demand is fixed by investors’ desire to invest in companies in certain spaces because they believe there's an upside for them. Supply of private companies stays pretty consistent over the years. It doesn't change that much. These are usually people who are quitting higher-paying jobs, or young people trying to start their own companies.It's a risky venture. And at the highest level, it's just supply and demand.
Alex: It's just one of those items that you need to have done. It's mainly a compliance item, but any sophisticated investor who's going to come in and look at the company will want to make sure that you're above board on all your different compliance items, such as 409A.
A lot of times investors do care about where the 409A lands, not because they're using it as a value to invest in the company, but to see it as a necessary tool to attract talent as well as provide upside not just for employees but potentially to themselves or the related parties that are coming in on the deal. It's important to have this stuff figured out for fundraising.
Dave: I've had a lot of founders ask, “Will this affect my fundraising value?” The short answer is no. It won't affect what investors think the company is worth, but it will affect how investors view the management team and the founders as being professional, getting everything completed, and doing everything above board. That's important because investing money into startups is highly risky. You're investing in teams effectively, so you have to really trust that those teams know what they're doing.
Alex: Yeah, I would say that also, if you're going to choose between having a 409A that's low or high, a lot of times if you have a 409A that's too high or doesn't make a lot of sense, it can cause some stress on negotiations.
Taking care of the 409A in advance, and making sure it makes sense, given the stage of the company and the employees, is important.
Dave: Several different groups could oversee a 409A valuation. If you're an early-stage startup, usually the founders are overseeing that process because they don't have a team yet. As they grow, it turns to the finance team, which would be the CFO or COO. Sometimes lawyers get involved, so the General Council for the company.
Dave: That's a great question. I think, under the regulations, you can do a 409A yourself, as long as you have the requisite background to understand private company valuation. So, you could try. But the reason people hire experts is because there's a safe harbor provision in the 409A regulations.
Safe harbor is a regulation that specifies that if a professional firm messes the valuation up, then the employees or equity holders aren't subject to penalties and interest because you trusted a third party, the professional firm, to do it. This is why everyone uses an external group. It removes the risk from the company board and transfers it to the valuation provider. Plus, it's rare to find a founding team with private company valuation expertise.
Dave: The highest level difference is that we're the only provider in the world that allows our system to produce multiple defensible prices. The actual company picks its final price. No one else gives companies insight into a range of defensible prices and lets the company pick the price that’s best for their situation. Everyone else puts a black box around how they determined the price and they spit out a report with that price with no real way of having any movement on the price they come up with.
With initio, it’s fast, it’s reviewed by our valuation experts, and it’s effectively customizable. That makes us different.
We also built the product in an intuitive way that allows non-technical people to understand the finances. Similarly to what TurboTax has done, we’ve taken something complex and distilled it down to enable anyone to run the process and to understand both what they're doing and the output they receive.
Alex: We've taken this clunky, opaque 409A process and modernized it specifically for early-stage companies.
We’re more affordable, much faster, and more flexible. No one else does that. As far as I'm aware, we're the first to have this type of workflow.
With initio’s innovative 409A platform that offers multiple defensible outcomes with intuitive customization, the process is reliable and accessible to everyone. Discover firsthand how initio can empower your startup with fast, affordable, and flexible valuation solutions by booking a demo with us today.
