Axiom Valuation has published a Kindle Ebook of its updated IRS 409A Stock Valuation Primer for Company Directors and Executives

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Since the implementation of IRS 409A, directors and executives of early stage companies have struggled to understand how the common stock of their companies should be valued for purposes of setting the strike price for stock option grants now that the old rule of 10% of the preferred price no longer applies. Dr. Stanley J. Feldman, chairman of Axiom Valuation, has published in the Kindle Store an updated and expanded guide for this audience, entitled A Primer on Valuing Common Stock of a Closely-Held Firm: Addressing the IRS 409A Dilemma.

Early stage companies have struggled to comply with the IRS 409A requirements, as they apply to the issuance of common stock options. Fortunately, companies can obtain a “safe harbor” position by retaining an independent valuation firm to determine the common stock price prior to issuing stock option grants. Axiom Valuation has conducted hundreds of valuations for IRS 409A purposes. In these engagements, Dr. Feldman has responded to many of the same questions from client board members and executives.

As Dr. Feldman explains, "We have developed this guide to help companies address questions raised by their boards of directors and other executives on the issues of setting the strike price for stock options and the impact of fair value on 409A valuations. Although most companies have been complying for the last several years with the valuation requirements of IRS 409A when issuing stock options, many impacted participants who are not involved in the valuation activity are still uncertain about the many of the key requirements and rationale for the program. There is also legitimate confusion about how companies reconcile valuations for FAS 157, IRS 409A, and FAS 123R."

While valuation issues may seem esoteric to some, it turns out that when directors and executives have a better understanding of how different liquidation preferences for preferred stock impact common stock value, there is more alignment between investors and management and more transparency for stock option holders.    As the Primer states: “… the value of a firm’s equity is related to the characteristics of newly issued preferred; namely, the value of common equity declines with the increase in liquidation preference. Although facts and circumstances will certainly drive per share common value, all else equal, the more cash flow that accrues to the preferred stock, the lower the value of common.” The Primer shows numerical examples of how changes in liquidation preferences impact the stock price.
The Primer is available at here.

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Dr. Stanley Feldman

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