Software companies are modernizing 409A valuations. This shift is producing 409A valuations that are cheaper, more accurate, and more insightful than the old 409As. As a former founder, I’m excited for 409A valuations to be more than just checking a box for the IRS—here’s why:
In 2009, I started a company called Looksharp. We had early traction and raised a small seed round (~$250k) to get our business off the ground. When the round closed, we were hit with a number of large, sunk costs. These included legal fees to the lawyers who helped us close, a deferred payment to our accounting firm, and lastly, spending money for our first ever 409A valuation.
Our lawyers said that the 409A process was standard, but that we should go with a well-known firm, “just to be safe.” We paid $7,500 for a report that we only looked at once. Just a week after our fundraise, we had gone from 12 months of runway to 10. The valuation was particularly painful; it cost as much as three months of my salary and had no immediate value outside of filling a requirement instituted by the IRS.
As my company grew, we raised an Angel round, then a Series A, and a bridge round. With each fundraise (and each material event in between, which included hiring a VP and acquiring a company), we got a new 409A. Every time it was the same process—we would shell out $7,500 for a report that I would never look at.
The valuation firms we used were not software companies, so every year they would have to pull in the same data and perform the same manual work. Even though we were repeat customers who had provided this data before, they still charged us the same fee. I was paying for peace of mind, but was still frustrated with a process that cost so much, took so much time, and resulted in a report I found unhelpful.
Over the past ten years, prices charged by traditional valuation firms have gone down—they now cost ~$5,000 depending on your company’s size and stage—but so has quality. In fact, many ‘top’ valuation firms outsource a good chunk of their Excel and data work overseas (emailing this data to 3rd party contractors is a major security risk). Today, valuations are a commodity but are still overpriced. And there is a lot more room to provide additional value to entrepreneurs.
Software is Changing 409A Valuations for the Better
eShares is investing profits from our core cap table business into valuations software that makes our process more accurate, more secure, and less expensive than other options.
Here are just a few of the major parts of the process we are working on:
Security. eShares has invested millions of dollars into security for our cap table business. These investments support and protect the data we collect for valuations.
Efficiency. If you are an eShares cap table client, eShares can automatically pull your cap table data into our valuation process. This means less data preparation for you, and less time that our analysts need to spend on manual data-entry work. Even if you are not a current eShares customer, we have built tools that make collecting and parsing your data easier, and that can easily re-use your previous valuations in future eShares-based 409As.
Accuracy. Human errors are the cause of most failed audits. Many valuation shops are overworked, and when you have people inputting hundreds of fields in Excel instead of computers, mistakes happen. Our technology allows us to move data more accurately, and has several safeguard checks prior to approval so that if an analyst does fat-finger an Excel field, the mistake gets caught.
Savings. With better technology and higher volume, we can charge less for every valuation without sacrificing quality.
Value for the entrepreneur. Last but not least, eShares is committed to making reports that are actually useful to founders. With the world’s largest database of private company valuations at our disposal, we can not only prepare the most accurate valuations but also provide industry-specific company comparables to help you benchmark your progress and pitch investors.
As a founder, nothing feels worse than spending a lot of money on a service or product that you never use. Just like Amazon Web Services made setting your servers a turnkey process, eShares is using software to lower the 409A hurdle for entrepreneurs in order to help them focus on growing their business and company.