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This article is wrong. Option strike prices and taxation are based on the 409A "fair market" valuation, not private valuations achieved during fundraising. Move

This article is wrong. Option strike prices and taxation are based on the 409A "fair market" valuation, not private valuations achieved during fundraising. Move the decimal one place to the left and the numbers in the article get a bit more realistic.

pcl 10y ago
Yes, and the math early in the article doesn't account for dilution. But those numbers are still colossal, even when reduced by an order of magnitude or two.
- myblake 10y ago
  True but it's at least mentioned. Would be worth emphasizing the effect it would have though, that engineer is not really sitting on 300 million.
viscanti 10y ago
It also pretends all of those would be taxed as income when that would likely be AMT.
- scurvy 10y ago
  For sure, AMT is much worse than regular income tax.
scurvy 10y ago
Actually, it depends. In Uber's case yes it would be the 409A as there is no secondary market. If there were a secondary market, it would be the last sales price from the day you exercised, not 409A value. The IRS guidelines say the spread between grant price and fair market valuation. If there's a secondary market, that's your fair market, not 409A (which is a joke anyway). Also, most companies use the last public valuation as a basis for 409A valuation rather than hiring someone to do it in a separate process. The investors buying shares are the experts here. Of course there are considerations for preferred vs common stock and things like warrants, but they start at the top line number from the last round.
- heyjonboy 10y ago
  No, that's incorrect (speaking as a founder who's raised $35mm and sold shares on the private market). Private financings will trigger a new 409a valuation but won't influence it. 409A valuations are typically based on Black Scholes and have no connection to private funding valuations. Secondary sales only affect fair market if there's a functioning secondary market, and AFAIK there are no private startups with a FUNCTIONING secondary market.
  - scurvy 10y ago
    You can do 409A however you want which is why I said it was a joke. I've worked in 2 places that based it off of last round after accounting for full dilution. You can use black Scholes, last round, or your finger in the air it doesn't matter. If it had to be accurate they wouldn't allow Black Scholes which has been all but disproven. Also there are lots of secondary markets for private companies right now. What makes you think otherwise?
    - steven2012 10y ago
      Okay thanks for confirming you don't know what you're talking about. Black scholes is options valuation and never used in 409A valuation. You can't just make stuff up, you have to justify it to your auditors.
      - scurvy 10y ago
        Options valuation is derived from your 409A valuation...and heyjon used Black Scholes to derive present option value. The two are related. Black Scholes is considered to be massively flawed by the larger public options market, but it's still used a lot in the private equity options side. Hence, why I said that it really could be whatever you wanted. If there were a legit requirement that it be an accurate valuation, you could never get away with Black Scholes. It's common knowledge that it's seriously flawed. As for 409A valuation, I've never heard of an auditor seriously examining it or questioning its validity. It's mostly the "valuation expert" says, "What value do you want for 409A?" You tell them, they ask to see the books, and then say "OK I can sign off on that."
draw_down 10y ago
I'd call that inaccurate but not wrong.

pcl 10y ago

Yes, and the math early in the article doesn't account for dilution. But those numbers are still colossal, even when reduced by an order of magnitude or two.

myblake 10y ago
True but it's at least mentioned. Would be worth emphasizing the effect it would have though, that engineer is not really sitting on 300 million.

viscanti 10y ago

It also pretends all of those would be taxed as income when that would likely be AMT.

scurvy 10y ago
For sure, AMT is much worse than regular income tax.

scurvy 10y ago

Actually, it depends. In Uber's case yes it would be the 409A as there is no secondary market. If there were a secondary market, it would be the last sales price from the day you exercised, not 409A value. The IRS guidelines say the spread between grant price and fair market valuation. If there's a secondary market, that's your fair market, not 409A (which is a joke anyway). Also, most companies use the last public valuation as a basis for 409A valuation rather than hiring someone to do it in a separate process. The investors buying shares are the experts here. Of course there are considerations for preferred vs common stock and things like warrants, but they start at the top line number from the last round.

heyjonboy 10y ago
No, that's incorrect (speaking as a founder who's raised $35mm and sold shares on the private market). Private financings will trigger a new 409a valuation but won't influence it. 409A valuations are typically based on Black Scholes and have no connection to private funding valuations. Secondary sales only affect fair market if there's a functioning secondary market, and AFAIK there are no private startups with a FUNCTIONING secondary market.
- scurvy 10y ago
  You can do 409A however you want which is why I said it was a joke. I've worked in 2 places that based it off of last round after accounting for full dilution. You can use black Scholes, last round, or your finger in the air it doesn't matter. If it had to be accurate they wouldn't allow Black Scholes which has been all but disproven. Also there are lots of secondary markets for private companies right now. What makes you think otherwise?
  - steven2012 10y ago
    Okay thanks for confirming you don't know what you're talking about. Black scholes is options valuation and never used in 409A valuation. You can't just make stuff up, you have to justify it to your auditors.
    - scurvy 10y ago
      Options valuation is derived from your 409A valuation...and heyjon used Black Scholes to derive present option value. The two are related. Black Scholes is considered to be massively flawed by the larger public options market, but it's still used a lot in the private equity options side. Hence, why I said that it really could be whatever you wanted. If there were a legit requirement that it be an accurate valuation, you could never get away with Black Scholes. It's common knowledge that it's seriously flawed. As for 409A valuation, I've never heard of an auditor seriously examining it or questioning its validity. It's mostly the "valuation expert" says, "What value do you want for 409A?" You tell them, they ask to see the books, and then say "OK I can sign off on that."

draw_down 10y ago

I'd call that inaccurate but not wrong.