Information and Documents Required for 409A Valuation: To run any kind of business module, financial data is a critical component. It helps you make decisions, conduct market analysis, understand customer requirements, perform financial planning and forecasting, and much more. A 409A valuation process is necessary to determine the Fair Market Value (FMV) of a private company’s common stock. This valuation is done for tax purposes for employees. When an employee pays taxes on equity compensation, the amount owed to the IRS would be determined based on the 409A Valuation Report. In this article, you will explore all the important information and documents required for 409A Valuation.

In addition, accurate financial information is essential for a 409A valuation process, which determines the FMV of a private company’s common shares.

What Type of Information is Required to Complete a 409A Valuation?

A 409A valuation is an essential step for private companies that want to issue stock options or shares to employees at FMV. It helps a company remain compliant with Internal Revenue Service (IRS) regulations, avoid penalties, and create transparency around how the business is valued.

To conduct a proper 409A valuation, you need to provide accurate and detailed information about your company. The process is not just about numbers, but about giving a detailed account of the business, its operations, and its future prospects.

Given below is the type of information required to complete a 409A valuation:

Company Details

The foundation of any valuation begins with a clear “Valuation Date”, i.e., the date on which the company’s value will be determined. It is the key valuation requirement, and much of the information below is based on it. After the valuation date, the valuation company will gather and review all relevant information to determine the FMV. This allows the valuation team to establish the identity and legal framework of your organization. Given below are the necessary documents:

  • The Company’s Legal Name
    It is officially registered in your documents. This ensures the valuation is tied to the correct legal entity.
  • Date of incorporation
    The official date your company was formed gives insight into how long the company has been operating.
  • Company Address
    The physical location or headquarters where your organization is based.
  • Legal Structure of Company
    The legal structure of your company, for example, a corporation, limited liability company, or partnership, impacts taxation and ownership rights.
  • Relevant Contact Information
    Includes key email addresses and phone numbers of representatives who can respond to valuation-related queries.

Having these details documented properly helps the valuation firm create a clear picture of the company’s identity and operations.

Capitalization Table

One of the most critical documents in a 409A valuation is the capitalization table. This document, which must be accurate as of the valuation date, outlines who owns what in the company and how the equity is structured.

The table should include:

  • List of Shareholders
    This includes founders, investors, and employees who own shares or options.
  • Ownership Percentages
    Shows the proportion of the company held by each individual or entity.
  • Securities Issued
    Includes common stock, preferred stock, options, or other equity instruments.
  • Transaction History
    Includes past financing rounds, stock issuances, or share transfers.
  • Preferred Stock Terms
    Includes liquidation preferences, dividend rights, and conversion details.
  • Convertible Securities
    Includes convertible notes or SAFE agreements, which may impact future ownership.

This document gives the valuation team a transparent view of how equity is allocated.

Financial Statements and Performance Data

A 409A valuation is ultimately about numbers, so financial information is a core part of the process.
Historical and projected financials help analysts determine the company’s health and growth potential.

Given below are the required financial documents:

  • Historical Financial Statements
    It provides insights into the company’s financial performance over time, using the following data:

    • Balance Sheet
      These are required for the past two to three years, and as of the specific valuation date.
      Projected balance sheets are also often necessary, particularly for companies using the
      income approach to reflect expected future growth.
    • Income Statement
      The 3 years of historical statements are required. Also, the year-to-date income statement
      from the start of the current year up to the valuation date is essential for the valuation.
    • Cash Flow Statement
      Three years of historical statements, as well as the year-to-date statement up to the
      valuation date. However, this information is optional.
  • Statement of Stakeholders
    Gives detailed insights into retained earnings, capital contributions, and distributions.
  • Financial Projections or Budget
    Provides 3 to 5 years of future projections from the valuation date, including key assumptions
    and methodologies.

Strong financial data not only supports the valuation but also gives potential employees and
investors confidence in the company’s stability.

Stock Option Agreements and Grants

One of the main purposes of a 409A valuation is to set FMV for stock options. Therefore, detailed information about option agreements and grants is essential.

  • Grant Dates
    The dates on which stock options were given.
  • Exercise Price
    The price employees or stakeholders pay to purchase shares through their options.
  • Vesting Schedule
    Explains how and when employees gain full rights to their options.
  • Expiration Date
    The timeline by which options must be exercised.
  • Termination of Options
    Outlines what happens to unvested or vested options when employees leave the company.

Providing this information helps valuation experts calculate the FMV of options and ensures compliance with tax laws.

Team Information and Management

The people behind the company play a huge role in its success. For this reason, 409A valuation providers often request details about the leadership and organizational structure.

Given below is the information they require

    • Background Information
      The company’s history, milestones, and achievements.
    • Executive Team
      Includes names, roles, and experience of key executives and founders.
    • Board of Directors
      The details of board members who provide governance and oversight.
    • Organizational Structure
      A clear chart showing how different departments and roles are arranged.
    • Succession Planning
      Explains how the company plans for leadership transitions and long-term organizational stability.
    • Team Growth Plans
      A description of future hiring and expansion plans.
    • Key Management Personnel And Their Relevant Experience
      Helps evaluators gauge the strength of leadership and operational capability.

This section highlights the human capital that drives the business and reassures investors and employees about long-term stability.

Documenting Data Sources: Ensuring Accuracy and Compliance

The documentation you collect for the data shared during the 409A service must be accurate, relevant, consistent, complete, and up-to-date, as this practice ensures data accuracy and compliance. Proper documentation allows companies to track the origin and characteristics of data they collect, ensuring its reliability, integrity, and adherence to regulatory requirements. For each data source, we need relevant details like name, description, owner, purpose, contact information, and any relevant legal or contractual agreements.

  • Identifying all the data sources used within your organization.
  • Metadata provides essential information about the data, including its structure, format, quality, and usage.
  • Data lineage is the ability to trace the origin and movement of data through various processes and transformations.
  • Establish data quality metrics that align with your organization’s data governance policies.
  • Establish data governance policies and procedures that govern the documentation and management of data sources.
  • Ensures that data sources remain reliable and align with the documented metadata.

Sharp 409A: The Leading Valuation Service Provider

Sharp 409A is a popular Valuation Provider in the industry that gives its 409A valuation services in 13+ countries. The services offered by Sharp 409A are not only time-saving but also cost-efficient. Leveraging advanced technology, we can evaluate your company’s data and provide a draft report within two working days.

It is supported by qualified professionals and it has been valuing the biggest startups and industries around the world, like medical devices, IoT, clean-tech, blockchain, software, healthcare, semiconductors, and emerging technologies. To avoid any kind of mistake, it uses an optimal mix of technologies and expert analysis to deliver accurate, accelerated, and effective cost valuations. It also follows all the Valuation Rules and Guidelines for giving the right valuation.

  • Independent Firm
  • Time-saving
  • Effective Cost
  • Experienced Firm

Conclusion

Obtaining an accurate 409A valuation requires comprehensive and precise data from various aspects of a business. The documents and information, ranging from financial statements to stock option plans, play a crucial role in ensuring the accuracy of the valuation. The more detailed and updated the data, the more reliable the valuation will be, which is essential for tax purposes and employee equity compensation. By providing all the necessary documents, businesses can ensure they receive the best possible 409A valuation, leading to better financial planning and compliance. We trust this article, “What Data and Documents Are Required to Complete a 409A Valuation,” has thoroughly addressed the topic. However, if you still have questions or require a 409A startup valuation, please contact us using the details provided.

Note*: “This information is not intended as legal advice and should not be considered a substitute for consulting with an attorney regarding your specific situation. Please contact a lawyer for professional guidance on any legal matters.”

Sharp 409A

Founded in 2014, Sharp 409A began with a mission to simplify 409A valuations for global startups. With 15+ years of experience, a presence in 13+ countries, and over 1,000 valuations covering assets worth 200B+ USD, we deliver independent, IRS-compliant, audit-ready fair-market value reports that companies can confidently rely on.