What are 409A valuations and how does Gust Launch provide them?
Because the United States tax code considers options to be “deferred compensation,” their value is subject to a tax code section called IRC 409A, which requires private companies to justify the exercise price of the options by defining their companies’ fair market value with a 409A report. To comply with this code section, companies must create a 409A report each year, as well as when certain events (called “material events”) cause the value of the company to change substantially. Gust Launch provides annual 409A reports as part of the Gust Launch Raise package.
The penalties for being non-compliant (or for having an inaccurate 409A valuation to back your option grants) substantially fall to the employee. If the IRS audits your company and finds you to be non-compliant, your employees might have to pay taxes immediately on all their vested options in addition to fines up to 20% of the options’ value.
The IRS occasionally audits companies that issue options. When your startup uses an independent valuation provider, you (and the employees to which you grant options) will benefit from Safe Harbor protection, meaning that the IRS would need to investigate your valuation and prove it to be unreasonable rather than requiring you to mount a defense in the first place.
Rather than risk putting your employees in a bad position with the IRS, Gust Launch EIPs require you to work with an independent 409A valuation provider, but at a substantial discount over other choices available in the market. Gust Launch’s partner, Preferred Return, will provide one 409A report per year as part of a Gust Launch Raise subscription, as well as a 60% discount on any subsequent 409A reports you need within that year. Because Preferred Return is independent, you and your employees will be afforded Safe Harbor protection and audit support in the event of an IRS inquiry.
We’ll guide you through the process of requesting a 409A valuation as part of the workflow to create an Equity Incentive Plan through Gust Launch Raise.