Valuations for Entrepreneurial Companies
Timan LLC provides accurate and cost-effective common stock appraisals for private companies to address rulings from the IRS and the SEC. We are foremost in our field with over 300 customers and 1000 valuations completed since 2006. Most important, Timan meets all of the requirements to allow you and your Board of Directors to get a Safe Harbor exclusion from IRC 409A.
All of our clients come from word-of-mouth referrals or from recommendations by customers and leading venture capital, law, and accounting firms.
About IRC 409A
In 2005 the Internal Revenue Service announced Internal Revenue Code 409A (IRC 409A) that shook up established practices for issuing employee equity incentives such as stock options. IRC 409A created new but manageable dangers for non-public companies that issue stock options to employees and consultants. The guidelines require companies to calculate and issue stock options at Fair Market Value or to be subject to tax consequences.
A flawed valuation can have a devastating impact on a company and its option holders:
♣IRC 409A provides that an option granted with an exercise price less than fair market value as of the date of the grant is a deferred compensation arrangement;
♣Below market options are subject to ordinary income and payroll tax, plus a 20% federal excise tax, plus an additional 20% excise tax for residents of some states;
♣Because these taxes are levied at vesting, option holders are liable for the tax regardless of their ability to sell the shares; and
♣Besides taxes owed by an employee, a Company and its directors could be liable for not collecting taxes on shares if the IRS later deems the shares were mispriced and, if there is a mispricing, an employee could sue the Company and its directors for the failure.
The net is that the game has changed completely in setting option prices for private companies—rules of thumb like a 10:1 ratio between the last preferred price and the exercise price cannot be used.
IRC 409A – The Facts
Valuation Principles. According to the IRS guidelines the factors to be considered under a reasonable valuation method include:
♣The value of tangible and intangible assets;
♣The present value of future cash-flows;
♣The readily determinable market value of similar entities engaged in a substantially similar business; and
♣Other relevant factors such as control premiums or discounts for lack of marketability.
Safe Harbor. The IRS regulations give you a “Safe Harbor” if you use an independent appraiser to value on your common stock. A Safe Harbor means that the burden of proof in a dispute moves from management and your Board of Directors to the IRS.
Changes to Valuation. The IRS’s expectation is that the common stock value of private companies will fluctuate just as it does for public companies. This means that business and market conditions, internal issues, and other factors may raise or lower common stock value as a company matures.
Timing. The IRS says that:
♣A valuation more than 12 months old will not be considered reasonable;
♣An earlier valuation will not be considered reasonable as of a later date if it fails to reflect information available after the earlier date that may materially affect the value of the corporation (e.g., a new round of financing); and
♣If a company has been in business more than ten years it must use an outside appraiser to value its common stock.
About Timan
We pride ourselves on performing quality work at a reasonable cost, meeting our deadlines, and minimizing the impact to management’s time and effort. You are busy running your business and we respect the fact that IRC 409A is not strategic to your business objectives. We realize that existing business appraisal firms may be intrusive, cumbersome and extremely expensive. Those appraisers may need to protect their business valuation service price points and time-consuming methodologies. Our goal is to be both cost effective and easy to work with. We have built a methodology that minimizes the impact on busy finance departments.
Timan’s Process
¬You fill out a questionnaire about your business, capital structure, financial results and plans, and other information.
¬We assess the information and identify any gaps. Once we have a complete portrait of your business we use our proprietary models to develop a draft appraisal report.
¬After you review the draft appraisal report for errors of fact we finalize it in a written report you and your Board use to set the exercise price of stock options.
¬We can update the appraisal based on new information periodically during a calendar year based on new developments in your business.
Our reports follow AICPA guidelines for company valuations and we have extensive experience with all Big 4 accounting firms.
Timan’s Team
Timan’s Founder Joshua Sommer is both a financial instruments expert and an experienced technology startup entrepreneur with considerable startup experience (he founded three major software companies) and financial experience (he’s worked on Wall Street as well as been a COO/CFO for long periods of his career. He earned his B.A. from the University of Virginia and his M.B.A. from the Stanford Graduate School of Business.
Vice President Victor Gilberti is a financial advisory expert and an experienced startup entrepreneur. He was Managing Director of an SEC Registered investment advisory firm and has been a fee only financial advisor to individuals and small businesses as well as a court appointed estate executor. He earned his B.S. and M.S. degrees from the Massachusetts Institute of Technology and his M.B.A. from the Stanford University Graduate School of Business.
Senior Analyst Lampros Fatsis is a CFA charterholder and an organizational consultant. He has fifteen years' experience as a financial analyst and portfolio manager. As a management consultant, he provides leadership development coaching to entrepreneurs, executives, and executive teams. Lampros earned a B.S. degree in Ship Design, an M.S. in Engineering, and an M.S. in Systems Management, all from MIT.
Senior Analyst Anamarie Huerta Franc is an experienced high technology veteran in both large companies and entrepreneurial start-ups. She spent three years in SAP’s Corporate Strategy Group and has extensive experience in Product Management at Oracle and at Vendavo. Anamarie earned an A.B. from Harvard College and an M.B.A. from the Stanford Graduate School of Business.
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