What is 409A and why this Internal Revenue Code Section require a valuation? 409A does not actually state that an independent valuation of a common share of the company is necessary. However, it does mandate that a certain level of financial acumen and experience be applied to estimate the share value of a private company. This share value must be less than or equal to the option strike price, or the employee granted the option is considered "in the money." The IRS considers the amount "in the money" as taxable income.
If an independent valuation is not necessary, why should the company (option issuer) be concerned? Because the IRS has increased the number of 409A audits. Second, we understand that many of these audits have been resolved by requiring a new and independent valuation. The 409A valuation should not be treated lightly or as a commodity handed to the low bidder. Ensure that the firm performing the analysis has the credentials and quality required by the IRS.