Bigfoot, Nessie, the $99 a Month 409A Valuation and Other Mythical Creatures
Growing up in the 1970s, I spent countless hours watching TV shows and reading news accounts on the search for Bigfoot, Nessie, the Yeti, the Kraken and, here in Texas, the Chupacabra. After over 40 years of sightings, as much as I want to believe they exist, each report has been discredited either as a case of mistaken identity or an intentional fake. You would think I would get discouraged, but hope is a powerful thing and I continue, 40 years later, to click on stories about these creatures on the off chance that this new one turns out to be real.
In the past year, I’ve seen reports of another cryptid relating to my business at Eton Venture Services of providing 409A valuations and other services – the “$99 a month 409A valuation”. It appears in my Google searches and in various blogs by entrepreneurs, lawyers and VCs. I really want to believe this is true – valuing a multi-million dollar VC-backed enterprise for $99/month (or $1188/year), plus a marginal cap table tool to boot. Where do I sign up?
Unfortunately, these sightings also go the way of Bigfoot, Nessie and my other childhood fascinations. Sadly, when I read the fine print, the “$99 a month 409A valuation” turns out to be a myth too.
Initial Set-Up Fees. For starters, there is an initial setup fee of at least $100, because to use the 409A service, you have to use the online cap table service for all of your equity and stock options – whether you, your lawyers or your accountants really want to use it.
Higher Monthly Fees for Multiple Stock Classes. Although it doesn’t appear in the Google ads, if you go deeper, you find that the $99/mo price only applies if you have one class of equity (common stock). Series A goes up to $149/mo, Series B to $199/mo and Series C to $249/mo. As your company grows, your “bargain” 409A valuation price increases significantly. From the base Google ad, you thought you were getting the valuation for $1188 per year ($99/mo), but most companies don’t start getting 409A valuations until their Series A round and that base cost is now $1788 per year ($149/mo). Once you get to the Series C round, it’s now a base cost of $2988 per year ($249/mo).
Additional Per Issuance/Transaction Fees. Oh, and did I mention, if you dig even deeper into the product, in addition to the setup fee and the monthly subscription fees, it’s also:
• $20 for each stock certificate you issue (after you get a few founders certificates for free)
• $20 for each option grant you make
• $20 for each transfer of any of the above ($40 for a partial transfer – requires 2 new certs)
• $20 for each option exercise
• $20 for each option cancellation/termination when employees leave
• $20 for each stock repurchase
That’s a lot of $20s (but payments are easy because it goes straight to your corporate credit card!). So let’s say your growing startup has an average of 120 stock transactions per year (issuances of stock, new preferred round with multiple investors with multiple funds, option grants for new hires for your rapidly growing business, a few option exercises, a handful of transfers and some cancellations and repurchases from folks who depart the business). Your “$99 a month 409A valuation” for your Series A funded startup is now at least $4288 per year - almost 3.5x what you thought it would cost! A Series C funded company is looking at a minimum of $5488 per year – over 4.5x more than the Google ad implied!
I don’t want to appear to be knocking the SaaS or subscription business model – it is a wonderful way to do business for both providers and customers. But, you should understand the real costs and benefits before making any decision.
Have you even talked to a real person yet?
When you did your Series A round, you used LegalZoom, right? When you were filing trademarks and patents to protect your hot new startup’s critical IP rights, it was LegalZoom again? You selected your legal counsel and tax advisors by putting out an RFP and selecting the low bidder? TurboTax for your growing company’s tax planning and filings? Car insurance from the low monthly payment guys with the crazy TV commercials too? I’m guessing the answer to all the questions above was 'no'.
If it was ‘no’, why would you trust setting the appropriate option price for your employees to maximize their incentives and minimize their tax risk with the IRS to an online, impersonal SaaS service? It’s one of the most important tasks you undertake to grow your startup into an industry dominating business with a mutli-million (or billion) dollar exit. Valuing your company is both a science and an art – it takes time and personal interaction to truly understand your business, your market and where you are heading to make appropriate judgments regarding the inputs and assumptions feeding into the financial models used to value your business. If your auditors, future buyers of the Company (plus their lawyers/accountants) or your IPO investment bankers or the SEC have questions about your prior valuations (and they always do), would you have any idea who to call for these answers? Would you trust someone you have never met to answer these questions at a critical time for your successful company? We’ve built Eton Venture Services based on personal service and taking the time to learn your market and business when valuing your startup.
Hire a trusted advisor for your most important tasks
While there is nothing wrong with using LegalZoom or TurboTax for certain routine matters, hopefully, you selected legal counsel who you viewed as a trusted advisor to guide your growing startup through your financings and other legal issues. You should do the same with your 409A valuation provider – because it’s so important to get it right to keep your employees incented to make your startup the next unicorn, thunder lizard or whatever the cool new term is now. These mythical creatures do exist , but they are very rare and extraordinarily difficult to create. Why take a chance when you can get personal service and trusted advice on your valuation for a comparable price?
Wish the “$99 a month 409A valuation” really did exist -- unfortunately, it does not.
As for me, it just rained today and it's the best time to find large footprints. I'm off to do some tracking -- you've gotta believe in something!