What is FMV for a Private Company Stock?
For public companies, the fair market value is public and determined by the market. In private companies, the Fair Market Value (FMV) is the accepted current value of one share of a private company's common stock. Fair Market Value is determined by independent third party appraisers. It represents what the stock would be worth on the open market.
Why does it matter to employees?
FMV is primarily used for two purposes:
- The current FMV is the value at which new employee option grants will be priced per share. For example, if I am hired at a company whose current 409a price is $1.00, the strike price of my options will be $1.00 per share.
- FMV is also used for tax purposes when exercising employee stock options. Taxes are computed based on the spread between the FMV and the exercise (strike) price of the options.
Long story short, it is important as an employee to know what the companies 409a price is when you first get hired, and when you decide to exercise your options. Accepting a job offer without knowing the strike price of your options or exercising options without understanding their current value (not to mention your potential tax liability), is just like buying a stock without knowing the price.
Head here for more on how your much your equity grant is worth.
How is the FMV determined?
The FMV is determined by a 409a Valuation which is required by law to be updated every 12 months or any time a company closes a funding round. It is calculated either by the company internally or by an independent firm. The 409a will be valued based on similar publicly traded companies, the company's cash flows, or the company's assets - typically a mix of all.
What is a 409a valuation?
IRS Section 409a was created in 2005 in response to the 2001 Enron scandal. Basically, 409a creates a check and balance by forcing private companies to conduct valuations through an independent third-party appraiser. In doing so, the 409a is considered a fair price by the IRS. This also ideally prevents companies from tampering with the price of the common for their own personal gain (i.e cheaper taxes, cheaper strike prices).
Any company that plans to issue common stock to employees must go through a 409a valuation in order to avoid IRS tax penalties. As noted above, companies must also go through subsequent 409a valuations every 12 months or directly following any event that materially affects the value of the company. Events that would likely trigger a 409a valuation include but are not limited to: funding rounds, acquisitions, and layoffs.
For more on 409a valuations, see this excellent blog post by Carta (who actually does 409a valuations!).
How do I find out my company's 409a price?
The short answer is to ask the company. Equity for most companies nowadays lives inside an equity portal such as Carta or Shareworks (aka Solium). Most companies will include their current 409a price in the equity portal (for example in Carta, the 409a price can be found in the 'exercise simulator' tab).
If your company does not have an equity portal (or does not include the 409a online), you should reach out to the person in charge of equity. This could simply be someone in HR or finance, but in many cases it will be a legitimate position such as Controller or Stock Plan Administrator. Simply reach out via phone or email. Tell them you plan to exercise your options and would like to know the current 409a price in order to understand your potential tax liability.
If you need help exercising your stock options or covering taxes, reach out via our webform below!