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].
Related Articles
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:
- Top Accounting Advisory Needs for Emerging Technology Companies
- Five Tax Considerations for Start-up Companies
- Understanding Leases In Technology Arrangements
- Pros and Cons of IPO for Early-stage Companies
- Emerging Technology Companies and the R&D Tax Credit
- Compilation, Review or Audit? What Early-Stage Companies Should Know
About Schneider Downs Emerging Technology Services
Schneider Downs understands the ever-changing landscape and business challenges facing companies focused on emerging technologies and software. Our clients represent a wide range of organizations, from emerging growth companies to large mature companies, and we are well-versed in the unique challenges they face. Our team of seasoned professionals has experience working with emerging technology companies in all phases of their evolution.
To learn more, visit our Emerging Technology page.
