Carta Collective

Hi- I need to add some stock option grants, but the system is giving me an error that I do not have a valid 409a valuation. Our 409a is ongoing, but not complete. How to I get around this issue- all of the grants were for hire dates prior to the expiration of the 409a.

Hi- I need to add some stock option grants, but the system is giving me an error that I do not have a valid 409a valuation. Our 409a is ongoing, but not complete. How to I get around this issue- all of the grants were for hire dates prior to the expiration of the 409a.

[as always, not legal advice]

Have these grants been previously Board approved? 

If yes, then you'd need to enter the Board-determined fair market value as of the date of the applicable Board Consent(s)/Minute(s) in Carta, and then enter the historic grants (i.e., with the true board approval date).  Or, if there was a prior 409a at the time of the Board approval(s), then those should be in Carta, and if the grant date and Board approval date are entered appropriately Carta should pull the FMV from those dates.

If no, that's a separate but related problem.    To be compliant, they need to be board approved to be granted, and the grant date should, in theory, never pre-date the Board approval date.   Note that you can still use the employee's start date as the vesting start date, or however you see fit, but the grant date is key here.  If that's the case, then the best practice order of operations would be to (1) wait for the new 409a, and then (2) have the Board approve the 409a and grant this batch of pending grants in the same Consent.  That Consent would detail the vesting start dates and all of the other relevant details.

Hi- I need to add some stock option grants, but the system is giving me an error that I do not have a valid 409a valuation. Our 409a is ongoing, but not complete. How to I get around this issue- all of the grants were for hire dates prior to the expiration of the 409a.

[as always, not legal advice]

Have these grants been previously Board approved? 

If yes, then you'd need to enter the Board-determined fair market value as of the date of the applicable Board Consent(s)/Minute(s) in Carta, and then enter the historic grants (i.e., with the true board approval date).  Or, if there was a prior 409a at the time of the Board approval(s), then those should be in Carta, and if the grant date and Board approval date are entered appropriately Carta should pull the FMV from those dates.

If no, that's a separate but related problem.    To be compliant, they need to be board approved to be granted, and the grant date should, in theory, never pre-date the Board approval date.   Note that you can still use the employee's start date as the vesting start date, or however you see fit, but the grant date is key here.  If that's the case, then the best practice order of operations would be to (1) wait for the new 409a, and then (2) have the Board approve the 409a and grant this batch of pending grants in the same Consent.  That Consent would detail the vesting start dates and all of the other relevant details.

Hi- I need to add some stock option grants, but the system is giving me an error that I do not have a valid 409a valuation. Our 409a is ongoing, but not complete. How to I get around this issue- all of the grants were for hire dates prior to the expiration of the 409a.

A follow-up @Teresa-Judith Chartrand. What are the limits on a board-determined FMV?

The company I'm advising has raised money, but only on convertible instruments and doesn't yet have employees and thus haven't done a 409a.

Revenue is also limited as this is early stage. Can the board (just the founders) essentially pick FMV out of thin air or is there a framework that should be followed?

As you can probably tell, there is not a ton of value at stake here, it's more that I want to run through the process to make sure I'm doing it right as I consider taking on more equity advisory roles.

Thanks for your insight!

[as always, not legal advice]

Have these grants been previously Board approved? 

If yes, then you'd need to enter the Board-determined fair market value as of the date of the applicable Board Consent(s)/Minute(s) in Carta, and then enter the historic grants (i.e., with the true board approval date).  Or, if there was a prior 409a at the time of the Board approval(s), then those should be in Carta, and if the grant date and Board approval date are entered appropriately Carta should pull the FMV from those dates.

If no, that's a separate but related problem.    To be compliant, they need to be board approved to be granted, and the grant date should, in theory, never pre-date the Board approval date.   Note that you can still use the employee's start date as the vesting start date, or however you see fit, but the grant date is key here.  If that's the case, then the best practice order of operations would be to (1) wait for the new 409a, and then (2) have the Board approve the 409a and grant this batch of pending grants in the same Consent.  That Consent would detail the vesting start dates and all of the other relevant details.

Hi- I need to add some stock option grants, but the system is giving me an error that I do not have a valid 409a valuation. Our 409a is ongoing, but not complete. How to I get around this issue- all of the grants were for hire dates prior to the expiration of the 409a.

A follow-up @Teresa-Judith Chartrand. What are the limits on a board-determined FMV?

The company I'm advising has raised money, but only on convertible instruments and doesn't yet have employees and thus haven't done a 409a.

Revenue is also limited as this is early stage. Can the board (just the founders) essentially pick FMV out of thin air or is there a framework that should be followed?

As you can probably tell, there is not a ton of value at stake here, it's more that I want to run through the process to make sure I'm doing it right as I consider taking on more equity advisory roles.

Thanks for your insight!

[as always, not legal advice]

Have these grants been previously Board approved? 

If yes, then you'd need to enter the Board-determined fair market value as of the date of the applicable Board Consent(s)/Minute(s) in Carta, and then enter the historic grants (i.e., with the true board approval date).  Or, if there was a prior 409a at the time of the Board approval(s), then those should be in Carta, and if the grant date and Board approval date are entered appropriately Carta should pull the FMV from those dates.

If no, that's a separate but related problem.    To be compliant, they need to be board approved to be granted, and the grant date should, in theory, never pre-date the Board approval date.   Note that you can still use the employee's start date as the vesting start date, or however you see fit, but the grant date is key here.  If that's the case, then the best practice order of operations would be to (1) wait for the new 409a, and then (2) have the Board approve the 409a and grant this batch of pending grants in the same Consent.  That Consent would detail the vesting start dates and all of the other relevant details.

Hi- I need to add some stock option grants, but the system is giving me an error that I do not have a valid 409a valuation. Our 409a is ongoing, but not complete. How to I get around this issue- all of the grants were for hire dates prior to the expiration of the 409a.

@Andrew Kirpalani this is a fantastic and important question - one I was going through a few months ago with two of our clients. We had an advisor to one of the companies calculate an FMV by using the valuation cap on the latest SAFE notes. For example - the valuation cap was $2M, and the number of shares outstanding was 5,000,000, so he said $2M / 5M shares = $0.40 per share (they had no preferred shares at the time, only the two founders' common shares).

The company had no revenue at the time, and hadn't raised more than $100k of funding via SAFE notes, so I thought that FMV was way too high for the stage they were at. They ended up doing a 409A valuation and the FMV came in below $0.05, which is a huge difference from the $0.40 strike price they almost issued options at.

Others may have a difference in opinion, but the times when I've seen a 'board determined' FMV actually be helpful and effective is when the company needs to issue option grants and their previous FMV has passed the 12 month mark, but they haven't really had any material changes since the last 409A valuation. The board may feel comfortable extending that same FMV so the option grants can be issued prior to getting a new 409A valuation.

A follow-up @Teresa-Judith Chartrand. What are the limits on a board-determined FMV?

The company I'm advising has raised money, but only on convertible instruments and doesn't yet have employees and thus haven't done a 409a.

Revenue is also limited as this is early stage. Can the board (just the founders) essentially pick FMV out of thin air or is there a framework that should be followed?

As you can probably tell, there is not a ton of value at stake here, it's more that I want to run through the process to make sure I'm doing it right as I consider taking on more equity advisory roles.

Thanks for your insight!

[as always, not legal advice]

Have these grants been previously Board approved? 

If yes, then you'd need to enter the Board-determined fair market value as of the date of the applicable Board Consent(s)/Minute(s) in Carta, and then enter the historic grants (i.e., with the true board approval date).  Or, if there was a prior 409a at the time of the Board approval(s), then those should be in Carta, and if the grant date and Board approval date are entered appropriately Carta should pull the FMV from those dates.

If no, that's a separate but related problem.    To be compliant, they need to be board approved to be granted, and the grant date should, in theory, never pre-date the Board approval date.   Note that you can still use the employee's start date as the vesting start date, or however you see fit, but the grant date is key here.  If that's the case, then the best practice order of operations would be to (1) wait for the new 409a, and then (2) have the Board approve the 409a and grant this batch of pending grants in the same Consent.  That Consent would detail the vesting start dates and all of the other relevant details.

Hi- I need to add some stock option grants, but the system is giving me an error that I do not have a valid 409a valuation. Our 409a is ongoing, but not complete. How to I get around this issue- all of the grants were for hire dates prior to the expiration of the 409a.

Agreed with you @Christopher Hoffmann

Other circumstances in which you could see founders use a 'board determined' FMV is when all equity holders are based outside of the US (so founders may think "why bother with a 409A, which is a US requirement"). 

@Andrew Kirpalani this is a fantastic and important question - one I was going through a few months ago with two of our clients. We had an advisor to one of the companies calculate an FMV by using the valuation cap on the latest SAFE notes. For example - the valuation cap was $2M, and the number of shares outstanding was 5,000,000, so he said $2M / 5M shares = $0.40 per share (they had no preferred shares at the time, only the two founders' common shares).

The company had no revenue at the time, and hadn't raised more than $100k of funding via SAFE notes, so I thought that FMV was way too high for the stage they were at. They ended up doing a 409A valuation and the FMV came in below $0.05, which is a huge difference from the $0.40 strike price they almost issued options at.

Others may have a difference in opinion, but the times when I've seen a 'board determined' FMV actually be helpful and effective is when the company needs to issue option grants and their previous FMV has passed the 12 month mark, but they haven't really had any material changes since the last 409A valuation. The board may feel comfortable extending that same FMV so the option grants can be issued prior to getting a new 409A valuation.

A follow-up @Teresa-Judith Chartrand. What are the limits on a board-determined FMV?

The company I'm advising has raised money, but only on convertible instruments and doesn't yet have employees and thus haven't done a 409a.

Revenue is also limited as this is early stage. Can the board (just the founders) essentially pick FMV out of thin air or is there a framework that should be followed?

As you can probably tell, there is not a ton of value at stake here, it's more that I want to run through the process to make sure I'm doing it right as I consider taking on more equity advisory roles.

Thanks for your insight!

[as always, not legal advice]

Have these grants been previously Board approved? 

If yes, then you'd need to enter the Board-determined fair market value as of the date of the applicable Board Consent(s)/Minute(s) in Carta, and then enter the historic grants (i.e., with the true board approval date).  Or, if there was a prior 409a at the time of the Board approval(s), then those should be in Carta, and if the grant date and Board approval date are entered appropriately Carta should pull the FMV from those dates.

If no, that's a separate but related problem.    To be compliant, they need to be board approved to be granted, and the grant date should, in theory, never pre-date the Board approval date.   Note that you can still use the employee's start date as the vesting start date, or however you see fit, but the grant date is key here.  If that's the case, then the best practice order of operations would be to (1) wait for the new 409a, and then (2) have the Board approve the 409a and grant this batch of pending grants in the same Consent.  That Consent would detail the vesting start dates and all of the other relevant details.

Hi- I need to add some stock option grants, but the system is giving me an error that I do not have a valid 409a valuation. Our 409a is ongoing, but not complete. How to I get around this issue- all of the grants were for hire dates prior to the expiration of the 409a.

A follow-up @Teresa-Judith Chartrand. What are the limits on a board-determined FMV?

The company I'm advising has raised money, but only on convertible instruments and doesn't yet have employees and thus haven't done a 409a.

Revenue is also limited as this is early stage. Can the board (just the founders) essentially pick FMV out of thin air or is there a framework that should be followed?

As you can probably tell, there is not a ton of value at stake here, it's more that I want to run through the process to make sure I'm doing it right as I consider taking on more equity advisory roles.

Thanks for your insight!

[as always, not legal advice]

Have these grants been previously Board approved? 

If yes, then you'd need to enter the Board-determined fair market value as of the date of the applicable Board Consent(s)/Minute(s) in Carta, and then enter the historic grants (i.e., with the true board approval date).  Or, if there was a prior 409a at the time of the Board approval(s), then those should be in Carta, and if the grant date and Board approval date are entered appropriately Carta should pull the FMV from those dates.

If no, that's a separate but related problem.    To be compliant, they need to be board approved to be granted, and the grant date should, in theory, never pre-date the Board approval date.   Note that you can still use the employee's start date as the vesting start date, or however you see fit, but the grant date is key here.  If that's the case, then the best practice order of operations would be to (1) wait for the new 409a, and then (2) have the Board approve the 409a and grant this batch of pending grants in the same Consent.  That Consent would detail the vesting start dates and all of the other relevant details.

Hi- I need to add some stock option grants, but the system is giving me an error that I do not have a valid 409a valuation. Our 409a is ongoing, but not complete. How to I get around this issue- all of the grants were for hire dates prior to the expiration of the 409a.

You definitely wouldn't want to pick a FMV out of thin air.  There are a handful of factors that go into a board-determined FMV (revenue, liabilities, industry risk, etc.), and this should be done thoughtfully and with the assistance of professionals as needed.

That being said, we (a law firm) always advise a 409a over board-determined FMV.  Honestly, we only really see Board-determined FMVs if we are inheriting a client that was already granting options on that basis.  By the time most of our clients are at the stage of putting together a compliant option plan, they are ready for a 409a.  Even SAFE and convertible note financings can have an impact on valuations, so even early-stage companies are safest doing a 409a.

A follow-up @Teresa-Judith Chartrand. What are the limits on a board-determined FMV?

The company I'm advising has raised money, but only on convertible instruments and doesn't yet have employees and thus haven't done a 409a.

Revenue is also limited as this is early stage. Can the board (just the founders) essentially pick FMV out of thin air or is there a framework that should be followed?

As you can probably tell, there is not a ton of value at stake here, it's more that I want to run through the process to make sure I'm doing it right as I consider taking on more equity advisory roles.

Thanks for your insight!

[as always, not legal advice]

Have these grants been previously Board approved? 

If yes, then you'd need to enter the Board-determined fair market value as of the date of the applicable Board Consent(s)/Minute(s) in Carta, and then enter the historic grants (i.e., with the true board approval date).  Or, if there was a prior 409a at the time of the Board approval(s), then those should be in Carta, and if the grant date and Board approval date are entered appropriately Carta should pull the FMV from those dates.

If no, that's a separate but related problem.    To be compliant, they need to be board approved to be granted, and the grant date should, in theory, never pre-date the Board approval date.   Note that you can still use the employee's start date as the vesting start date, or however you see fit, but the grant date is key here.  If that's the case, then the best practice order of operations would be to (1) wait for the new 409a, and then (2) have the Board approve the 409a and grant this batch of pending grants in the same Consent.  That Consent would detail the vesting start dates and all of the other relevant details.

Hi- I need to add some stock option grants, but the system is giving me an error that I do not have a valid 409a valuation. Our 409a is ongoing, but not complete. How to I get around this issue- all of the grants were for hire dates prior to the expiration of the 409a.