There is no shortage of 409A valuation providers out there for early-stage startups. Some providers tout speed, while others offer an automated, hands-off process for busy and cash-strapped executives.
It can be important to think carefully about what provider you choose when it comes to 409A valuations because they can play a key role in valuing a company's equity and forming a long-term equity strategy. Over time, you may find that your criteria and expectations for a valuation provider change as 409A valuations become more complex.
Here are five questions to consider when evaluating potential 409A valuation providers:
Gone are the days when a private company could use a simplistic rule of thumb to set the fair market value (FMV) of common stock at 10-20% of the most recent preferred round. If someone tells you your company’s 409A valuation is too high and should be “X% of the preferred,” they may be giving outdated advice and potentially sacrificing the validity of the valuation to align with an outdated rule of thumb.
Some valuation providers promise quick turnarounds on their valuations, but often at the expense of frequent communication and collaboration with their clients. While a more transactional relationship with a provider may save founders time in the short term, it can limit their ability to ask questions and feel confident in the final valuation result. Founders may instead want to look for a provider that offers a more personalized approach that includes space for questions and ongoing dialogue through the valuation process.
409A valuations may also impact secondary transactions and warrant liabilities. While these may not be things a founder is thinking about today, having a valuation provider with knowledge and direct experience in these areas can help founders feel more prepared to mitigate challenges down the road.
Similarly, founders may not be thinking about their valuation needs a few years down the road or when it comes time to go public. However, leveraging a single valuation provider throughout the company lifecycle can not only offer consistency in the valuation methodology but also reduce the headaches associated in the valuation process – such as defending prior valuations, incorporating prior company-specific information into current analyses, and providing financial disclosures.
If a company is audited or needs to provide audited financial statements (or faces examination by the SEC during an IPO), it may benefit from having a provider that offers audit review support. Such audit review support can also help relieve pressure on the founder or CFO to react quickly if an auditor reaches out with a potential legal or compliance concerns. And experience matters—having a provider who has deep history with later-stage audits and private-to-public events is important.
What separates Morgan Stanley at Work Valuation Services from other providers is an emphasis on cost-effectiveness without compromising quality. Our Shareworks platform can help remove some of the time and labor-intensive aspects of conducting a valuation by integrating directly with a company’s existing cap table. Clients have the additional confidence of knowing their valuation is supported by Morgan Stanley at Work’s team of professionals with over 60 years of combined experience and 7,000 valuations under their belts. Those specialists are available by phone or email throughout the valuation process and can field valuation-related questions that occur throughout the company’s lifecycle.
Request a 409A valuation and learn more about the team, software, and methodology behind Morgan Stanley at Work Valuation Services.
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