5 Classic and Costly Start-up Mistakes
Ivan Gaviria, an attorney at Gunderson Dettmer’s Silicon Valley office, recently posted 5 classic (and costly) mistakes startups make with their people.
What made #5 on his list? Ignoring Internal Revenue Code 409A.
Avoid tax penalties and painful employee complications
His short note makes several excellent points. 409A has changed board practices at VC backed technology companies for setting the exercise prices on stock option grants. He points out the potential nasty tax penalties of non-compliance as well as the “safe harbors” in the 409A regulations. And he stresses the importance to the founders of startups to understand these safe harbors and the possible unpleasant side effects on optionees.
Of course, we’re in the business of providing 409A valuations in accordance with the tax code’s safe harbor provisions. But we see many boards not committed to 409A compliance, and it is a recipe for downstream pain. We can’t make 409A go away, but we can make the process of compliance a bit easier. The thing to understand is that valuation has become part of the standard accounting and tax compliance process for early stage companies.
409A compliance makes an M&A event go smoother
As Mr. Gaviria has cautioned, inadvertent problems with 409A compliance can lead to ‘…significant cost and delay when they have to be solved under the scrutiny of an acquiring company’s accountants and counsel.” I would add that the costs and delays can also occur at the point a company engages financial auditors for any reason, and the scrutiny gets more intense as the company prepares for an IPO or acquisition.
Bill Denebeim is a Vice President of The Brenner Group and has more than twenty years experience providing financial, regulatory and operational consulting services to executive management and investors of technology companies. Bill received his M.S. in Operations Research from Stanford University and his B.A. degree in Economics and English from the University of California at Berkeley. Bill is a holder of the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of San Francisco.
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Entry filed under: Valuations.