Meaning
Independent financial valuations establish the fair market value of underlying corporate equity against regulatory standards for tax and compliance purposes. A common stock appraisal determines the strike price for employee stock options under Section 409A of the internal revenue code. Establishing an objective valuation protects recipients from deferred compensation penalties.
Regulatory Compliance
Formal valuation reports grant safe harbor status against tax authority audits when conducted by qualified independent valuation experts. Performing a common stock appraisal annually protects the board of directors from liability during option issuance.
Methodology Selection
Valuation firms apply income or market-based financial models depending on company stage, revenue predictability and venture funding history. A common stock appraisal synthesizes discounted cash flow models with comparable public company multiples to isolate the fair market value of junior securities relative to senior preferred stock classes. Liquidation preferences and voting rights reduce common share value compared to preferred shares held by investors.
Accurate discounting reflects the illiquidity and subordinate position of common equity.
Option Pricing
Strike prices set below fair market value trigger severe tax penalties and interest charges for equity award recipients. Obtaining a common stock appraisal ensures that incentive stock options conform to statutory safe harbors. Proper option pricing preserves the retention value of equity compensation packages.
