4 ms·
It's the 409A valuation, not the funding amount, that matters. 409A value is usually much much less than the funding round.
by pfarnsworth 10y ago
It's the 409A valuation, not the funding amount, that matters. 409A value is usually much much less than the funding round.
- hkmurakami 10y agoThat'll apply to the strike price as well as the current "valutation", so the multiple factor between the two valuations should be around the same regardless (a strike price of a non trivial number like $0.27 suggests that a 409a valuation was already in place to price the options)
- pjschlic 10y agoThe original 4.8M valuation (which is his strike price - extrapolating from his share price and ownership %) has now increased to ~40M (extrapolated from 20M raise, estimating ~100M preferred shares valuation and 40% of that for 409A valuation[1]). This means 4k outlay for initial stock, but they are now valued at ~33.2k, incurring some short term capital gains of ~5.6k. This still seems like a steal, as is the value dropped on that valuation of 33k I think it can be recognized as a loss to offset other earnings, so generally I don't think the tax is that bad a deal (if the person has the cash on hand). [1] 41% is average ratio from here: https://www.capshare.com/blog/409a-valuation-guide/ https://www.capshare.com/blog/409a-valuation-guide/
- hkmurakami 10y agoThx for the analysis. Fwiw capital loss can only be applied to offset capital gains, other than 3k/year.
- syntheticcdo 10y agoCapital losses also carry forward for your entire life. Either 3k a year of offset ordinary income until you die, offset any future capital gains, or have written off your entire loss.
- pfarnsworth 10y agoI don't know what the OP's marginal tax rate was, but if he were a California resident, his taxes would be more around 15k.
- pfarnsworth 10y agoI actually have no idea what you're talking about. 0.27 strike price was the 409A valuation at the time that the options were issued. There is usually another 409A valuation after the funding round. But we don't know what that value is. You can speculate, but using the funding round as the amount is wrong.
- hkmurakami 10y agoThere's typically a lower bound of 1/10 the paper valuation, otherwise you risk the IRS coming after you at some future date. That relative lower bound ratio should be consistent across rounds, hence I'm approximating with a paper valuation ratio with a fudge factor of 2.
- pfarnsworth 10y agoThe company doesn't control the 409A valuation. That's done by an independent company who determines the 409A. So it's not something that is in the control of the company.
- hkmurakami 10y agoYou can't control them, but you can definitely "provide guidance" to the independent company as to what your desires are. They obviously won't give you something egregious but it's you who's paying them and will continue to pay them every year (a 409a valuation needs to be within 1 year to be valid for options). If a firm doesn't do something you like, you'll move onto the next one.
- jdmichal 10y agoSure, just like a house appraiser is an independent entity who determines the value of the house... Except that they always take the contract price in mind and basically attempt to not rock the boat. If they can make a case for a valuation close to the contract price, that's what they'll use. If they go too high or low, they risk killing the deal -- and their continuing business with the involved parties. Same problem as with legal arbiters and binding arbitration contracts.