Case Study – USA 409a Valuation

Case Study #2 – USA 409a Valuation
  • An Australia domiciled Pty Ltd had issued stock options to US tax residents as part of their USA expansion, requiring a valuation to be completed to identify the fair market value of the options for compliance with US regulation, IRC 409a.
  • The initial 409a valuation completed by another provider was costly, poorly documented and significantly inaccurate due to inferior valuation techniques used and lack of proper understanding of their application.
  • Having gone through a new round of financing, the Company required another 409a valuation to be completed and Company X decided to test the market, ultimately contracting InteleK after initial scoping / educational calls.
  • InteleK valued Company X via two different methods, following appropriate valuation practices without using the value implied by the most recent round of financing. The reason for this was that after a review of the specific investors, they were determined to be large existing shareholders who had a strategic & synergistic incentive, which is not consistent with the ‘hypothetical market participants’ of the Fair Market Value standard of value.
  • Secondly, the recent financial round was nine months from the valuation date (within the 12-month guidelines) however, the business had materially changed within that nine months, making this technique further irrelevant.
  • Valuing the Company under the guideline public company and guideline transactions methodologies and applying the appropriate equity allocation method for Company X’s complex capital structure, allowed the company to be accurately valued, resulting in a value materially lower than that implied by the recent round of funding, which will save millions in stock option compensation expenses.
  • External time pressures dictated a two week deadline. InteleK’s expertise delivered a 300 page fully detailed and supported report and provided the standard meeting with management, covering a comprehensive explanation of all considerations that arrived at the conclusion of value.

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