The real money on the table from a poor-quality 409A valuation lays ahead and underlies the ultimate purpose for the 409A valuation report: tax compliance. That is the province of the IRS…and, in the case of California, the Franchise Tax Board – neither warm to tax evaders, as governments are cash starved in a weak economy, and their penalties and interest prove it. For the taxing entities, the penalty is 20% to the IRS on the taxable income and is triggered from vesting date, not exercise date, and 20% to the FTB, plus underpayment interest at a combined 6%. (more…)
In Part I of this series, we explained why you can’t judge a valuation or a firm by its fees . Coming into focus now should be an understanding of how a poorly prepared valuation turns into a time and cost debacle as valuators battle and hourly billing charges escalate. Let’s put some hard numbers on the assumptions. (more…)
When was the last time you bought a service you understood little about and, for lack of any other reason, selected the vendor based on price? Happens all the time with electricians, lawyers, mortgage brokers, auto repair shops, and tax preparers. And the consequences can be immense as the incompetent prey on the ignorant, often delivering little if any value for their fees.
One such field that gets lots of play is the compliance valuation performed primarily for IRC 409A to justify private company stock option strike prices, and secondarily for ASC 718 to account for equity based compensation. (more…)
In proceedings before the Court of Federal Claims, the IRS won a significant victory over a taxpayer who appealed penalties and interest levied against him by the IRS for having received undervalued stock options. In the ruling, the IRS persuaded the court to make a number of judgments upholding its position that certain stock options constitute deferred compensation and are subject to IRC 409 penalties and interest. (more…)
Much is being written about how “broken” our current venture capital financing model continues to be. One of the most seriously broken areas is financing an early stage company. Venture capitalists continue to publicly state that they wish to fund early stage companies. The true facts are that most early stage venture capitalists are not looking for early stage companies but rather companies either in revenue or very close to it. The line has shifted, and the definition of early stage seems to have moved or been changed for most venture funds. (more…)
Much has been written of the Kauffman Foundation report, “WE HAVE MET THE ENEMY…AND HE IS US” from May, 2012 about the abysmal returns from venture funds, particularly larger ones, since the late 90’s.
Some of Kauffman’s findings from their experience with 100 VC funds over 20 years are frightening to those of us rooting for a healthy VC industry:
• “VC returns haven’t significantly outperformed the public market since the late 1990s, and, since 1997, less cash has been returned to investors than has been invested in VC.”
• “Only twenty of 100 venture funds generated returns that beat a public-market equivalent by more than 3 percent annually, and half of those began investing prior to 1995.”
• “Only four of thirty venture capital funds with committed capital of more than $400 million delivered returns better than those available from a publicly traded small cap common stock index.”
• “The average VC fund fails to return investor capital after fees.” (more…)
The current all-time high lifetime gift tax exemption is set to expire December 31, 2012. Appraisals are key to establishing the fair market value of assets gifted before the deadline.
The lifetime gift tax exemption is $5.12 million for individuals and double that amount for married couples pooling their resources – that’s about to change unless the Congress acts before December 31, 2012. If the exemption is allowed to expire, it will revert back to $1.0 million. The IRS’ basic publication on estate and gift taxes can be found in this IRS brochure (PDF). (more…)