409a Valuation ServicesValuing the gem

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VALUATION SERVICES | FINANCIAL REPORTING | HEDGE FUND SERVICESNILE R IVER VENTURE

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We aim to be a leading independent global hedge fund services and valuation services provider, operating in key onshore and offshore financial centers including USA, UK, Canada, Brazil, France, and India.

Setting benchmark in ValuationsN I L E R I V E R V E N T U R E

PA RT N E R S

Founded by former FINRA certified professional and audit valuation experts from Big Four Audit firms. With in-depth industry knowledge in Biotech, Pharmaceuticals, Information Technology, Clean Energy, and e-Commerce, etc., and battery of veteran Patent lawyers, we deliver a bouquet of valuation services under one roof.

Services

Transaction Support• Fairness Opinion• Financial Modeling• Buyer & Seller Services

Hedge Fund Administration• Shadow Fund Accounting• Middle Office• Portfolio Analytics

Financial Reporting & US Tax Compliance• IRC 409A Valuation• Fair Value Measurement (ASC 820)• Share Based Payments (ASC 718)

IPO Valuation Services• IPO Valuation• Post-IPO Advisory

N I L E R I V E R V E N T U R E PA RT N E R S

Internal Revenue Code 409a (IRS 409a)

Section 409A came into effect in October, 2004 and is a part of the American Jobs Creation Act, 2004. The code is conceived to address misuse of deferred compensation plans such as long term incentive plan, nonqualified retirement plans, employee stock options and annual performance bonus.

Key PrincipleIt is propounded that 409A relates to the issuance of deferred compensation, especially employee stock options. It has been established that granting stock options with a price below the market value of underlying security amounts to the immediate transfer of value and creation of a taxable event.

Noncompliance Penalties

The penalties for selling options with prices deemed to be below fair market value are severe. It can result in immediate taxation on the intrinsic value of the option exceeding the exercise price. It can also result in a 20% penalty.

To avoid such issues, companies usually hire valuation professionals to determine a fair market price of the underlying security. However, Section 409A does not make it mandatory to hire a valuation firm, thoughit requires that the valuation be performed by a qualified and experienced person.

Many companies regularly fail to consider issues that may arise from improperly performed valuations related to  409A. Failure to comply with 409A can attract heavy financial penalties. Tax penalties, potential exposure for board members, acceleration of taxable income are common penalties that can result from failure to comply IRC code 409A. This provision is particularly very important for start-ups companies as they have a long way to go.

Valuation Parameters

The Five Factors must be considered in valuation under section 409A.

The fair market value of tangible and intangible assets of the company.

The current value of future cash flow. The market value of stock of comparable

companies. Recent transaction involving the sale and transfer

of Company’s stocks. Discount for lack of marketability.

IRS encourages companies to consider all the three approaches, i.e., the Income Approach, the Market Approach and the Asset Approach in determining value under 409A. Companies should avoid overly “simplistic” valuation of approach that relies on rule of thumb unreasonable assumptions.

Startups FactorDue to concerns about high compliance costs, many start-ups perform valuation internally. The majority of start-up companies that hire a valuation firm usually tend to consider the cost factor than the quality factor. It is to be noted that improper valuation can ruin a start-up easily. Entry level companies should be aware of IRS audit and review, the objections raised in such audits and reviews are usually accepted. Thus, start-up companies have to ensure they make their every moved in correct way. Though, there is no provision for conducting compulsory audit, the IRS is empowered to conduct random audit. The number of such audits of late has increased.

Important ConcernBeside the IRS issue, there is another important concern, if a start-up company conducts valuation internally it is more likely that venture capital firm would reject its prior 409A valuation work. This can jeopardize financial opportunity that the start-up company was seeking for. It is an open secret that many Venture Capital firm restrict their portfolio companies from recruiting

companies other than those included in the list of reputable valuation firm. Even upon acceptance many venture capitals companies re-do the earlier 409A of newly included start-up company.

Recent complianceThe IRS has recently created a compliance initiative project (CIP) for IRC Section 409A. As part of the CIP, the IRS will review the deferred compensation plans of selected employers to evaluate their compliance with Section 409A requirements. This foreshadows a much broader Section 409A enforcement initiative. Obtaining a defensible appraisal is an important step in potentially saving you and your employees from unnecessary IRS challenges and penalties.

In a nutshell, there are several issues that company management have to consider while evaluating 409A valuation procedures. An independent valuation from a qualified expert or firm will help companies ensure that these critical issues have been addressed properly.

Nile River Advantage

Nile River has established a team of experts that have experience in valuing businesses across diverse industry sectors and all developmental stages; ranging from clients with seed funding to pre-IPO stage. With the team having experience of both valuations and audits, our detailed and insightful Section 409A appraisal reports, along with our responsive support, help our clients easily pass through any stringent audit review process in a smooth, efficient and time-bound manner.

Why Us

Ex big four valuation specialist Experience of 1000+ reports on 409a 409a valuation with Attorney support Strong domain expertise across Industries and

Verticals

Disclaimer

The information on this Services Brochure is for general information purposes only. It does not constitute professional advice, whether legal or otherwise, and does not purport to be comprehensive. Nile River and its affiliates do not accept responsibility for loss that may arise from accessing or relying upon the information contained in this document.

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For further information please contact us at info@nilerivervp.com

VALUATION SERVICES | FINANCIAL REPORTING | HEDGE FUND SERVICESNILE R IVER VENTURE

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