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- 409A Valuation
A third-party valuation of a company’s Common Stock intended to satisfy the requirements of IRC Section 409A. Most commonly, a company pays a third-party valuation firm to complete the 409A Valuation to help the Board determine the Fair Market Value of the Common Stock. The Board then uses that Fair Market Value to set the Exercise Price for grants of Options to Employees and other service providers. Note that the Board may only rely on this 409A Valuation for up to 12 months, and if significant changes in the business occur before 12 months lapse, the 409A Valuation is no longer valid.
- 83(b) Election
A tax election that can be made when a shareholder receives an Equity grant that has a substantial risk of Forfeiture. Usually 83(b) Elections occur in Startups with grants of Restricted Stock, where Vesting is applied. By making this election, a shareholder elects to pay tax on the current value of the Equity above the Per Share Price paid at the time of grant, instead of the value of the Shares when they actually vest. The benefit of this election is that at the time the shareholder receives the Shares, the difference between current value and what the shareholder paid is usually zero, and thus there is no immediate tax due and any subsequent gain would be Capital Gains. By contrast, without this election, the shareholder would then have to pay the tax on the gain at the time any Shares vest (which could be monthly and the value could continue to go up). If the value of the company’s shares increase over time (which is the goal of all Startups, of course), the shareholder runs the risk of having to pay tax on a greater amount down the line, and that tax would be ordinary income instead of Capital Gains. This election is most common in Early Stage companies where the value of Equity received is small enough such that the taxable income to the shareholder or the Per Share Price for the Equity is manageable. However, if the shareholder stops working for the company and loses a portion of Shares that had not yet Vested, the shareholder will not get back the amount paid up front to make this election. It is always a good idea to run this type of tax decision by a personal tax advisor.
A term used to describe the application of technology to a specific industry. Some common examples include: adtech, agtech, cleantech, edtech, fintech, regtech, etc.