Startup 409a valuation price & privately traded stock price

New / R&D cdo7Ree5
Jun 16 13 Comments

Been talking to a startup that has wide discrepancy between latest 409a valuation stock price & privately exchanged stock price.

How does this work in general? What is privately traded price? Why do startups do this?

Also say 409a stock price = $10 & privately traded stock price = $20, what is the fair price to use in tallying offer tc?

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TOP 13 Comments
  • Uber lock_up
    Preferred stock holders get preferred shares which has downside protection through liquidation preference. 409a value will usually be 1/2 -1/4 of preferred stock price and the gap would close as the company gets ready for IPO. Your tax calculations will be based on the company’s 409a price at all times. Feel free to DM me if you have more questions and I can point you to articles that might be helpful.

    And please please double check the information you get from others including me. You can never be too careful with this.
    Jun 16 4
    • New / R&D cdo7Ree5
      OP
      Ok. If two prices converge eventually and assuming one holds till the ipo, then quoting on (1/2-1/4) common stock price is surely better given the target. Is this common practice in the industry?
      Jun 17
    • Uber lock_up
      Yes, every startup will have a 409a value that is typically much lower than its preferred stock price (which is used to report total valuation). The number of stocks however, maybe be computed by the preferred stock price. For instance, if FMV is $10 and preferred price is $25, they will say they are offering you $250,000 in stocks if they give you 10,000 options. The value of your options in this case is 10,000 x (25-15) = 150,000.
      Jun 17
    • New / R&D cdo7Ree5
      OP
      Ok makes sense this is assuming option strike = fmv = $10 = 409a stock price which seems to be always the case?
      Jun 17
    • Uber lock_up
      Yes, the strike price is always the FMV on the date of grant. FMV for the common stock will change over time as the company evolves. But the strike price for your grant is fixed once it is granted. The difference between FMV on date of exercise and your strike price would be your potential paper gains for tax purposes.
      Jun 17
  • New / Strategy MWSt70
    Don’t know much about this but if you have a low 409a valuation you can pay taxes at that rate (income taxes) immediately, and when you sell later at a higher price you only have to pay capital gains on it, often much less than income. So a low 409a valuation benefits you greatly if the stock appreciates.
    Jun 16 2
    • New / R&D cdo7Ree5
      OP
      can you pay tax as soon as the stock vests before ipo?
      what about the case of stock option with strike = 409a price?
      Jun 16
    • New / Strategy MWSt70
      will defer that to someone more knowledgable here
      Jun 16
  • Google larrypagei
    Ask for fair market value. They will tell you the number.
    Jun 16 4
    • New / R&D cdo7Ree5
      OP
      FMV is the same as latest 409a valuation number and that makes sense to me. But how does private share trading among investors work? at elevated price.. Does it mean that investors value this startup higher than 409a?
      Jun 16
    • Google larrypagei
      FMV is not same as 409a it seems. Uber for long time had 409a price of $48 but FMV of $42.
      Jun 16
    • Uber lock_up
      @larrypagei you are misguiding people with your posts. FMV is the 409a price. Preferred stock price will typically be multiple times that of 409a value because they get preferred stocks with liquidation preferences.
      Jun 16
    • Google larrypagei
      Ok. So what was the preferred stock price of Uber pre IPO? The two numbers I gave were from a recruiter and a friend at Uber.
      Jun 16