409A Valuation for Technology Startups

In the very first years of a company’s history, it can be difficult to provide a proper business valuation due to the fact that there is little data by which to come to a conclusion regarding that company’s value. Internet and technology businesses may take several years before seeing any significant revenue and are often inaccurately valued as a result. Traditional methods that accountants use to determine a section 409A valuation for small technology startups such as the income approach may not provide a fair assessment. Simple409A uses a combination of several different approaches when assessing a company so that important information is not left out in the process.

Discounted Cash Flow Often Has No Place in Early Stage Technology Company Valuations

The purpose of a company appraisal is to evaluate its past success and its potential value in the future to investors or acquirers. Discounted cash flow analysis is based on a concept called “the time value of money” which calculates the present value of a steadily growing stream of after tax profits, or “free cash”. Newer internet and technology companies often have no significant free cash flow that can be used to determine the company’s direction, and revenue projections are generally too unreliable to determine the potential value in the future, making discounted cash flow of little value when trying to determine the value of the company.

The Market Approach Can Be a Good Method for Startup 409A Valuations

By comparing a business with other businesses that are similar in nature and size, it is possible to perform a company appraisal on the basis of a side by side comparison. Data from acquisitions and investments in startups can provide a clear picture for experienced appraisers. Factors are taken into account such as initial investors and how the company has grown compared to its peers. An assumption is made that similar companies in similar industries will be of comparable value. If there is insufficient data to value a startup company using other methods, comparing it to its peers is a viable option.

Tying the Business Valuation Together Using Multiple Approaches

Where a discounted cash flow analysis may fail to provide an accurate and reliable private company valuation, other methods can be employed. At Simple 409A, we understand that it is important to address your 409A valuation from several angles in order to provide a fair appraisal. This is why we do not rely solely on traditional methods, but consider how your business compares to similar businesses in your field and the assets that your business has available to grow and invest in its future. For more information or to get started with your 409A valuation, fill out our contact form or give us a call today.

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