You're considering asking Carta for a dollar value for your founder stocks, but you're not sure where to start. Carta is a leading provider of equity management and administration services.
To get a dollar value for your founder stocks, Carta will perform a valuation of your company's equity. This valuation is based on a snapshot of your company's financials and other relevant data.
Carta's valuation process typically includes a review of your company's financial statements, including your income statement, balance sheet, and cash flow statement.
Carta Pricing and Valuation
Carta uses a proprietary software to assign values to share classes during the 409A valuation process.
The software includes checks for accuracy and undergoes internal review against Carta's valuation policy.
Carta's valuation team is independent, but analysts can utilize cap table data and valuation software to automate calculations, allowing for more focused attention on the company's specifics during the valuation analysis.
Carta offers three standard methodologies used during a 409A valuation: market approach, income approach, and asset approach.
The market approach uses the Option Pricing Model (OPM) backsolve technique, which assumes that new investors pay fair market value for equity, typically in preferred stock.
The income approach determines a company's value by evaluating its projected future cash flows and considering associated risks.
The asset approach evaluates a company's valuation by assessing its net asset value.
Carta requires a current and validated cap table for the 409A valuation process, which can be ensured by Carta's integration with financial statements and projections through XeroTM and QuickbooksTM.
To prepare for a 409A valuation, Carta requires the following documents:
- Financial statements
- Projections
- Convertible notes (if applicable)
- Rights and preferences (if applicable)
These documents can be uploaded through Carta's integrations with XeroTM and QuickbooksTM.
A 409A valuation remains valid for a maximum of 12 months, so it's advisable to request a new 409A valuation annually.
However, there are other events during which you might need to conduct a 409A valuation, such as:
- Equity compensation
- Mergers and acquisitions
- Employee stock purchase plans (ESPPs)
- Private placements and fundraising
- Financial reporting
Here are the common 409A valuation methodologies used by Carta:
These methodologies can be used individually or in combination to determine the fair market value of a company's common stock.
Preparing for Valuation
Preparing for Valuation can be a daunting task, but Carta's requirements can help guide you. Carta’s requirements for a 409A Valuation include having their own requirements for the valuation process.
Carta needs a detailed report and supporting documentation, including the company's financial statements and any other relevant information. This is likely to help ensure the accuracy of the valuation.
To be prepared, it's essential to understand Carta's specific requirements, such as their 409A Valuation needs.
Valuation Preparation
To prepare for a valuation, it's essential to have a current and validated cap table. Carta ensures this by reviewing your cap table and gathering essential details needed for the valuation.
Carta's integration with Xero and Quickbooks allows for seamless uploading of financial statements and projections, making the process smoother and more efficient.
An analyst will review your data and documents, and may reach out to confirm details or schedule a discussion to capture qualitative risks, industry-specific information, and assumptions in the projections.
Carta's proprietary software is used to conduct a preliminary analysis, assigning values to share classes and undergoing internal review against Carta's valuation policy.
Carta's requirements for a 409A Valuation include:
- Having a current and validated cap table
- Uploading financial statements and projections through Xero and Quickbooks integrations
Using Carta for both cap table management and 409A valuations can save time and enhance audit defensibility.
Step Four: Request Form
Preparing for a 409a Valuation in Carta requires careful attention to detail, and the request form is a critical part of the process.
The request form will automatically fill in with the details you've entered on the preceding pages, so make sure to review and confirm the accuracy of the information.
You'll need to confirm the status of your company's most recent 409a valuation, select the preferred valuation date, and acknowledge that no securities have been issued since that date by checking the box.
To proceed, you'll need to enter your company's revenue and EBITDA for the twelve months preceding the valuation date, as well as for the twelve months prior to the valuation date.
You may also need to indicate whether you have knowledge of your company's projected revenue and EBITDA for the twelve months following the valuation date, and input the projected figures if applicable.
If you're unsure of the exact forecasts, a high-level estimate will suffice.
You'll also need to choose a minimum of three public and three private companies that are akin businesses operating within the same industry, share a similar business model, or would be directly affected by your operations' impact.
Here are the key fields you'll need to complete in the request form:
- Request details: Confirm the status of your company's most recent 409a valuation, select the preferred valuation date, and acknowledge that no securities have been issued since that date.
- Revenue and EBITDA: Enter your company's revenue and EBITDA for the twelve months preceding and prior to the valuation date.
- Projected revenue and EBITDA: Indicate whether you have knowledge of your company's projected revenue and EBITDA for the twelve months following the valuation date, and input the projected figures if applicable.
- Comparable companies: Choose a minimum of three public and three private companies that are akin businesses operating within the same industry, share a similar business model, or would be directly affected by your operations' impact.
By carefully completing these fields, you'll be well on your way to a successful 409a valuation in Carta.
Valuation in Carta
To get a valuation in Carta, you'll need to follow these steps. Carta ensures your cap table is current and validated, saving time by providing essential details needed for the valuation.
Carta includes additional information, like financial statements and projections, through XeroTM and QuickbooksTM integrations. This helps the analyst review your data more efficiently.
An analyst reviews your data and uploaded documents, and may reach out to confirm details or schedule a discussion to capture qualitative risks, industry-specific information, and assumptions in the projections. They'll use Carta's proprietary software to assign values to share classes.
The software includes checks for accuracy and undergoes internal review against Carta’s valuation policy. This ensures the valuation is accurate and reliable.
To start the valuation process in Carta, log in to your account, navigate to "Compliance & Tax > 409A Valuations" on your dashboard, and click "Get Started". You'll then review what to expect from the valuation process and click "Start 409A request".
Resolve any drafts, examine convertible notes, and validate the accuracy of economic rights and preferences. These steps are crucial to ensuring the valuation is accurate and compliant with IRS regulations.
Here are the key steps to follow:
- Login to your account and navigate to "Compliance & Tax > 409A Valuations"
- Click "Get Started" and review what to expect from the valuation process
- Resolve any drafts and examine convertible notes
- Validate the accuracy of economic rights and preferences
- Click "Start 409A request" to proceed
A 409A valuation remains valid for a maximum of 12 months, so it's advisable to request a new 409A valuation annually, or whenever significant events occur.
When to Conduct a Business Valuation
Conducting a business valuation is a crucial step in determining the value of your company's founder stocks. This process is typically required when issuing stock options, restricted stock units, or other forms of equity-based compensation to employees, consultants, or advisors.
A 409A valuation remains valid for a maximum of 12 months, so it's advisable to request a new one annually if no significant events occur within that timeframe.
You might need to conduct a 409A valuation in the following situations:
- Equity Compensation: If your company plans to issue stock options, restricted stock units (RSUs), or other forms of equity-based compensation.
- Mergers and Acquisitions: During merger or acquisition negotiations to assess the value of the company's common stock.
- Employee Stock Purchase Plans (ESPPs): If your company offers an ESPP allowing employees to purchase company stock at a discounted price.
- Private Placements and Fundraising: Investors in private placements or fundraising rounds often require a 409A valuation to assess the fair market value of the company's common stock.
- Financial Reporting: In some cases, companies may use 409A valuations for financial reporting purposes, particularly for startups and privately held companies.
- Equity Management: Typically precedes equity management, providing an accurate assessment of the fair market value of your company's common stock.
Frequently Asked Questions
Do founders need to pay for shares?
Founders typically don't pay a significant amount for their shares when a company is first set up, as the purchase price is often very low, such as $0.0001 per share. However, the total cost can still add up, like $500 for 5 million shares.
Is founders stock taxable?
Founders stock is generally taxable as ordinary income, subject to both federal and state taxes, just like a regular salary. Learn more about tax implications of selling founders shares.
Sources
- https://www.businessinsider.com/how-to-value-startup-equity-carta-ceo-2018-8
- https://kruzeconsulting.com/what-is-the-best-free-cap-table-management-software-for-startups/
- https://tribecap.co/1-trillion-in-equity-how-carta-is-set-to-unlock-the-private-markets/
- https://www.concrete.vc/blog/2022/04/03/cap-tables-with-carta-best-practices-for-startup-founders/
- https://www.levy.company/startups/409a-valuation-using-carta
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