{"id":7870,"date":"2020-09-24T23:54:23","date_gmt":"2020-09-24T23:54:23","guid":{"rendered":"http:\/\/www-staging.carta.com\/sg\/?p=7870"},"modified":"2021-03-05T06:54:28","modified_gmt":"2021-03-05T06:54:28","slug":"getting-through-valuations-audit","status":"publish","type":"post","link":"https:\/\/www-staging.carta.com\/sg\/blog\/getting-through-valuations-audit\/","title":{"rendered":"5 expert tips on getting through a valuations audit"},"content":{"rendered":"<p><span style=\"font-weight: 400\">As a private company, you may need to get an independent valuations audit to satisfy <\/span><a href=\"http:\/\/www-staging.carta.com\/blog\/why-its-smart-to-share-your-cap-table-with-your-investors\/\"><span style=\"font-weight: 400\">investor requirements<\/span><\/a><span style=\"font-weight: 400\">, answer a lender\u2019s questions, or prepare for an IPO.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Going through the valuation process can help you better understand your financials and make more informed decisions when planning for a material event. Here\u2019s what you need to know about 409A valuations and how to prepare for a successful valuations audit.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400\">What\u2019s a 409A valuation?<\/span><\/h2>\n<p><span style=\"font-weight: 400\">\u201cA <\/span><a href=\"http:\/\/www-staging.carta.com\/blog\/what-is-a-409a-valuation\/\"><span style=\"font-weight: 400\">409A valuation<\/span><\/a><span style=\"font-weight: 400\"> is a formal report that determines the fair market value of a private company&#8217;s common stock,\u201d says Tami Tande, a senior manager on Carta\u2019s 409A valuations team. Once you know your stock\u2019s <\/span><a href=\"http:\/\/www-staging.carta.com\/blog\/what-is-fair-market-value\/\"><span style=\"font-weight: 400\">fair market value<\/span><\/a><span style=\"font-weight: 400\">, you can set a strike price and issue stock options to employees.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Though a 409A valuation is technically a tax compliance report, Tande says it\u2019s also used to satisfy <\/span><a href=\"http:\/\/www-staging.carta.com\/blog\/what-is-asc-718\/\"><span style=\"font-weight: 400\">ASC 718<\/span><\/a><span style=\"font-weight: 400\">, the accounting standards code that affects how you report stock-based compensation expenses on your company\u2019s income statement.<\/span><\/p>\n<p><span style=\"font-weight: 400\">When reviewing a 409A valuation, auditors consider a handful of different factors, including how reasonable the <\/span><a href=\"http:\/\/www-staging.carta.com\/private-companies\/asc-718\/\"><span style=\"font-weight: 400\">stock-based compensation<\/span><\/a><span style=\"font-weight: 400\"> expenses and fair value assertions are, says Tande.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">They also might look at:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><b>Economic climate:<\/b><span style=\"font-weight: 400\"> How is the current economic climate\u2014such as COVID-19\u2014impacting business?<\/span><\/li>\n<li style=\"font-weight: 400\"><b>Industry:<\/b><span style=\"font-weight: 400\"> How is the industry in question faring in the current economic climate?\u00a0<\/span><\/li>\n<li style=\"font-weight: 400\"><b>Math: <\/b><span style=\"font-weight: 400\">Is all the math from the valuation correct?<\/span><\/li>\n<li style=\"font-weight: 400\"><b>Methodology:<\/b><span style=\"font-weight: 400\"> Are the methods used in the report reasonable and in line with accounting guidelines?<\/span><\/li>\n<li style=\"font-weight: 400\"><b>Key assumptions: <\/b><span style=\"font-weight: 400\">Do the assumptions used in the valuation make sense?\u00a0\u00a0<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-weight: 400\">How to manage the valuations audit process<\/span><\/h2>\n<p><span style=\"font-weight: 400\">Valuations audits can be tedious, but there are steps you can take to eliminate potential hurdles and set your team up for success.\u00a0<\/span><\/p>\n<p><strong>1. Host a kickoff call between your audit firm and appraisers<\/strong><\/p>\n<p><span style=\"font-weight: 400\">Communicating with your audit firm and appraisers <\/span><i><span style=\"font-weight: 400\">before<\/span><\/i><span style=\"font-weight: 400\"> starting an audit can help prevent confusion and frustration down the road.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">\u201cYou can get completely different valuations on the same asset depending on who&#8217;s doing the valuation,\u201d Tande says. \u201cAuditors have their own internal standards and opinions on how things should be done,\u201d she adds, so it\u2019s a good idea to make sure everyone is on the same page regarding methodology and assumptions.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">\u201cYou basically want to get the auditor&#8217;s approval upfront so there are no surprises when the 409A report is delivered,\u201d Tande says.\u00a0<\/span><\/p>\n<p><strong>2. Prepare a financial forecast<\/strong><\/p>\n<p><span style=\"font-weight: 400\">One of the items a valuation firm looks at when reviewing a 409A report is the company\u2019s financial forecast. Documenting any critical financial changes in your company and explaining these to your appraiser and auditor can result in a smoother, more accurate valuation.<\/span><\/p>\n<p><span style=\"font-weight: 400\">When creating a forecast, make sure you address the effects of recent material events\u2014for example, COVID-19\u2014and use reasonable assumptions to support your predictions, says Candice Bassell, a managing director for Carta\u2019s <\/span><a href=\"http:\/\/www-staging.carta.com\/blog\/how-carta-does-enterprise-valuations\/\"><span style=\"font-weight: 400\">enterprise valuation<\/span><\/a><span style=\"font-weight: 400\"> team.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">She recommends considering the following:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Was there a change in your forecast due to COVID-19? How do you estimate that change?<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Did you lose customers?<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Are there other things that occurred in the business that would support a change in value, such as a reduction in force or a <\/span><a href=\"http:\/\/www-staging.carta.com\/blog\/fundraising-covid-19\/\"><span style=\"font-weight: 400\">change in the ability to raise a round<\/span><\/a><span style=\"font-weight: 400\">?<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">You may also want to include any recent significant transactions in your valuation analysis, says Brian Allen, Carta\u2019s VP, Corporate Controller. Think: primary rounds of funding or <\/span><a href=\"http:\/\/www-staging.carta.com\/blog\/liquidity-event-tender-offer\/\"><span style=\"font-weight: 400\">secondary transactions<\/span><\/a><span style=\"font-weight: 400\"> involving company stock.<\/span><\/p>\n<p><span style=\"font-weight: 400\">\u201cAt Carta, we&#8217;ve done three <\/span><a href=\"http:\/\/www-staging.carta.com\/blog\/tender-offer-faq\/\"><span style=\"font-weight: 400\">tender offers<\/span><\/a><span style=\"font-weight: 400\"> in the last couple of years, and that&#8217;s had a big impact on how we think about our 409A process,\u201d he says. \u201cWe&#8217;ve had a lot of conversations with our team explaining how the tender offer was constructed and how to think about that in a valuation.\u201d<\/span><\/p>\n<p><strong>3. Review the valuation report and ask questions<\/strong><\/p>\n<p><span style=\"font-weight: 400\">Once your appraiser finishes your 409A report, <\/span><a href=\"http:\/\/www-staging.carta.com\/blog\/understanding-409a-valuation-report\/\"><span style=\"font-weight: 400\">review the valuation<\/span><\/a><span style=\"font-weight: 400\"> and ask questions. Understanding your valuation is crucial to effectively addressing any questions your auditor has later on.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">\u201cDon&#8217;t just look at the final value of common stock and say the value looks too high,\u201d Tande says. \u201cYou need to really read through the report, consider all the major assumptions, and make sure everything seems reasonable.\u201d\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">If you have questions about the data tables or inputs used, for example, take this time to ask your appraiser. Once you\u2019re comfortable with the report, you can deliver it to the audit firm.\u00a0<\/span><\/p>\n<p><strong>4. Prepare written responses to auditor questions<\/strong><\/p>\n<p><span style=\"font-weight: 400\">After reviewing a valuation, your audit firm will likely send questions for you and your appraiser to answer. \u201cIf you get questions, it doesn&#8217;t mean it&#8217;s a bad valuation\u2014it&#8217;s just part of the audit process,\u201d says Allen.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Work with your appraiser and management team to provide written responses to your auditor\u2019s questions. \u201cSometimes, the auditors will want to get on the call right away,\u201d Tande says. \u201cHowever, I find that written responses are more effective and a better use of everybody&#8217;s time.\u201d\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">After you share your written responses, you can schedule a call to address any follow-up questions your auditor might have.\u00a0<\/span><\/p>\n<p><strong>5. Create a valuation memo<\/strong><\/p>\n<p><span style=\"font-weight: 400\">Before you close the books, create a valuation memo that can transport you to the mindset you were in when you went through a specific valuation, Allen says. This could come in handy for future valuations.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">He recommends including the following:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Key information you sent to the valuation team<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Copies of the forecasts or supporting materials you provided<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">The list of questions the auditor sent, plus your responses<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">\u201cI also put together a summary talking about the 409A from a qualitative perspective,\u201d Allen says. For example: \u201cHere&#8217;s how our business is going. Here&#8217;s how we think COVID-19 is affecting the business. Here&#8217;s how we think our new forecast is going to impact us in the future.\u201d\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400\">How often should you get a new valuation?\u00a0<\/span><\/h2>\n<p><span style=\"font-weight: 400\">Most private companies get new 409A valuations annually or, sooner, if they experience a material event, like a merger or <\/span><a href=\"http:\/\/www-staging.carta.com\/blog\/how-to-raise-a-round\/\"><span style=\"font-weight: 400\">new financing round<\/span><\/a><span style=\"font-weight: 400\">. However, with COVID-19 shifting business models and <\/span><a href=\"http:\/\/www-staging.carta.com\/blog\/impaired-valuations\/\"><span style=\"font-weight: 400\">affecting financing<\/span><\/a><span style=\"font-weight: 400\">, it can be helpful to get valuations more frequently.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">\u201cThis year, only about 25% of the valuations Carta performed were driven by financing,\u201d Bassell says, compared to nearly 60% of the valuations in April 2019. \u201cThis indicates to us that a lot of people are updating their valuations due to changes in business fundamentals, rather than changes based on financing.\u201d<\/span><\/p>\n<figure id=\"attachment_7872\" aria-describedby=\"caption-attachment-7872\" style=\"width: 4800px\" class=\"wp-caption alignnone\"><img loading=\"lazy\" class=\"size-full wp-image-7872\" src=\"https:\/\/www-staging.carta.com\/sg\/wp-content\/uploads\/sites\/9\/2020\/09\/Repricings-by-quarter.png\" alt=\"\" width=\"4800\" height=\"2401\" srcset=\"https:\/\/www-staging.carta.com\/sg\/wp-content\/uploads\/sites\/9\/2020\/09\/Repricings-by-quarter.png 4800w, https:\/\/www-staging.carta.com\/sg\/wp-content\/uploads\/sites\/9\/2020\/09\/Repricings-by-quarter-1024x512.png 1024w\" sizes=\"(max-width: 4800px) 100vw, 4800px\" title=\"\"><figcaption id=\"caption-attachment-7872\" class=\"wp-caption-text\">Many of the companies Carta performed valuations for in the last six months experienced declines in their common stock value due to Covid-related business changes. Companies with declining values often elect to reprice their employees&#8217; existing options. See more data in our <a href=\"http:\/\/www-staging.carta.com\/blog\/cartas-private-markets-report-q2-2020\/\">Q2 2020 Private Markets Report<\/a>.<\/figcaption><\/figure>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400\">If your company hasn\u2019t been notably affected by COVID-19 or the economy, you may not need an updated valuation, Bassell says. However, \u201cIf your forecast has changed significantly or if you&#8217;ve gone through a reduction in force, a new valuation could be helpful,\u201d she says.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Reach out to your valuation provider to talk about what makes the most sense for your company.<\/span><\/p>\n<h2><span style=\"font-weight: 400\">409A valuations with Carta<\/span><\/h2>\n<p><span style=\"font-weight: 400\">A good valuation firm can facilitate the valuations audit process and make your job that much easier. Whether you\u2019re getting a valuation for the first time or need a new valuation, Carta can help. We deliver over 6,500 409A valuations each year, so our team is well-equipped to guide you through the process and answer your questions.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">After your first 409A, we\u2019ll <\/span><a href=\"http:\/\/www-staging.carta.com\/blog\/the-carta-409a-valuation-process\/\"><span style=\"font-weight: 400\">deliver an updated report<\/span><\/a><span style=\"font-weight: 400\"> every year or every time you have a material event to help keep you take advantage of the <\/span><a href=\"http:\/\/www-staging.carta.com\/blog\/what-is-a-409a-valuation\/#jumpto5\"><span style=\"font-weight: 400\">409A IRS safe harbor<\/span><\/a><span style=\"font-weight: 400\">. Plus, we\u2019re always thinking of ways to make valuations audits even easier.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Here are a few changes we\u2019re in the process of making:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Creating an online portal for you and your auditors to upload questions and receive written responses automatically\u00a0<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Hosting valuation reports online so auditors can log in to review calculations\u00a0<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Using more aggregated, anonymized data to show auditors how a valuation is performed and its assumptions compare to other valuations their firm has reviewed<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">\u201cThose are all in the early stages,\u201d Bassell says, \u201cbut we&#8217;re excited to find ways to disrupt the status quo and make the valuations audit process better for everyone involved.\u201d\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Getting through a valuations audit may seem intimidating, but with the right team and strategy, you can come out the other side more informed about where your company stands and what you need to achieve. If you need help along the way, Carta is here for you. Learn more about our <\/span><a href=\"http:\/\/www-staging.carta.com\/private-companies\/409a-valuations\/\"><span style=\"font-weight: 400\">409A valuation process<\/span><\/a><span style=\"font-weight: 400\">.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<h6><b><i>DISCLOSURE: <\/i><\/b><b><i>T<\/i><\/b><b><i>his publication contains general information only and eShares, Inc. dba Carta, Inc. (\u201cCarta\u201d) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.\u00a0 This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.\u00a0 Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.\u00a0 T<\/i><\/b><b><i>his communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.<\/i><\/b><span style=\"font-weight: 400\">\u00a0<\/span><\/h6>\n","protected":false},"excerpt":{"rendered":"<p>Our experts walk through what you need to know about 409A valuations and how to prepare for a successful valuations audit.<\/p>\n","protected":false},"author":104,"featured_media":7883,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[19],"tags":[26,176,93,402],"acf":[],"_links":{"self":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts\/7870"}],"collection":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/users\/104"}],"replies":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/comments?post=7870"}],"version-history":[{"count":0,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts\/7870\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/media\/7883"}],"wp:attachment":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/media?parent=7870"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/categories?post=7870"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/tags?post=7870"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}