Startup 409a valuation price & privately traded stock price
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?
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.
can you pay tax as soon as the stock vests before ipo? what about the case of stock option with strike = 409a price?
will defer that to someone more knowledgable here
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.
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?
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.
Ask for fair market value. They will tell you the number.
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?
FMV is not same as 409a it seems. Uber for long time had 409a price of $48 but FMV of $42.