Why is it important for California and Idaho start-ups to issue stock options at fair market value? Part of the reason is 409A.
409A is a tax provision whose goal is to reduce corporate excess like deferred payouts to company executives. However, 409A has also been interpreted to cover stock options if the exercise price is set too low (below market value) at the time the stock is grated. If this is found to be true, there will be punitive tax consequences.
Not only does 409A incentivize the start-up to set the stock option price at fair market value, but it can provide guidance to companies on how to set exercise prices. The best course of action is to perform an independent third-party investigation to perform a valuation on your company and establish what fair market value of the company really is. There are likely a number of valuation firms in your area that can provide competent valuations for your company. Contact Fisher Hudson Shallat attorney’s for any questions you have about valuing your company.