How Do I Value My Company So That I Can Grant Stock Options?
New companies frequently have to confront this issue. After the founders stock issuances, the founders want to grant stock options to new hires. Internal Revenue Code Section 409A requires that stock options be granted at fair market value to avoid adverse tax consequences.
But how do you determine fair market value?
The law does not require that companies hire an independent, third party appraiser to value your stock. You may want to; it may be very helpful to you if you do. But the law does not require it.
What the law does require is that the valuation be determined by the "reasonable application of a reasonable valuation method."
In general, we recommend at a minimum that companies make a determination of fair market value based on the value of assets and liabilities on the balance sheet, discounted cash flows if projections are possible, and any third party offers to buy the stock of the company (if available), and the company should keep a record for its own purposes of how it reached its conclusons. We are of course lawyers and not valuation experts, and companies may want to consult with valuation consulting firms if they do not feel comfortable with their internal capabilities in this regard.
