Internal Revenue 409A Valuation Services

Congress enacted Section 409A of the Internal Revenue Code in October 2004 as part of the American Jobs Creation Act. Among other provisions, the Act broadly regulates “deferred compensation,” which has been defined to include stock options. Congress directed the Internal Revenue Service (IRS) and the Treasury Department to draft regulations providing much of the detail. In December 2004, the IRS released Notice 2005-1 to provide initial guidance. Subsequently, on September 29, 2005, the IRS issued proposed regulations under Section 409A. Companies may rely on this guidance until final regulations are enacted. Comments on these proposed regulations may be submitted to the IRS. A public hearing is scheduled for January 25, 2006. The purpose of this alert is to provide you with a basic insight to common questions on Section 409A as it relates to stock options.

  • Are you in the process of creating a plan to comply with the IRS Code Section 409A?
  • Do you have a valuation program in place that is affordable and defensible?
  • Do you have a valuation services partner with the experience and track record that makes you and your portfolio companies comfortable? 

Sherwood Partners, LLC (“Sherwood”) can help with your 409A compliance process and create a measured and cost-effective program that can minimize your potential liability under this new Internal Revenue Code section.

Experience

Sherwood works with a number of top tier venture capital and private equity firms. Based on our understanding and experience assisting venture and private equity backed companies, Sherwood has the “know how” to issue supportable valuations. Our valuation reports conform to industry standards; are well-organized and defensible.

Services

Sherwood recommends that any 409A portfolio program begin with a minimum of an annual company valuation and then provide a systematic process for quarterly updates. This has been successful in the past as it enabled companies to continuously grant options at fair market value without the potential risk of financial restatements at a later date or during the IPO process.

 

 

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