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Fundraising is an essential function for any start-up company. And, after undertaking a fundraising event, companies must decide whether to obtain a valuation report.
From a financial reporting standpoint, the best practice is to obtain a new valuation each time a capital raise occurs. This provides evidence both for the value of the shares after the equity raise and for inputs into share-based compensation models, which is common in start-up companies because of how often they issue stock options or restricted stock.
Accounting Standards Codification Section 718, Compensation–Stock Compensation (ASC 718) requires equity-based awards to be valued at fair value. One of the most common ways to value equity-based awards is through a pricing model. Because one of the key inputs in a pricing model is the value of the stock, having a valuation of the stock price as of the date of a capital raise provides additional third-party evidence for those inputs.
Additionally, for tax purposes, a 409A valuation is required any time a Company is going to be giving out equity over a period of time. In fact, a 409A valuation can be used for both tax and financial reporting purposes.
This is because Accounting Standard Update 2021-07 (ASU 2021-07) allows as a practical expedient, a nonpublic entity to determine the current price input of equity-classified share-based awards issued to both employees and nonemployees to use a reasonable valuation method.
The same characteristics used in a 409A valuation are an example of a way to achieve the practical expedient; therefore, a 409A valuation report would provide evidence for both tax and financial reporting purposes.
If you have any questions about business valuation or fundraising for an early-stage or startup company, please contact the team at [email protected].
This article is part of a series exploring the complex business challenges startup and early-stage companies may encounter as they grow. Additional articles include:
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