The adverse effects of under-valuing stock options -- Why startups shouldn't ignore 409A

featuring Sanjay Gandhi & David Lipa of Roebling Partners
hosted by Wilson Sonsini and media sponsored by Startup Digest 

Target Audience:
a) Founders/CFOs of startups that are about to raise or have already raised funding
b) VC staff

Note: Due to limited space, service providers are asked to pay a fee should they want to attend
Food and drinks will be provided

Purpose:
Wilson Sonsini Goodrich Rosatti, the legal representative to once startup companies Google, eBay, Apple, etc.  recently sent out memos to their startups about Section 409A with a recommended course of action. This event intends to educate startups about why they should not ignore the new laws governing stock option issuance (which affects the majority of startups) and to explain the process of enterprise valuation and equity allocation (e.g. allocating value among preferred and common stock) for startups.  It will also highlight the do's and don'ts of when and how the new regulations apply to your company and how you can access IRS-approved safe harbor provisions to mitigate risk.

More detail:
Recent changes in the regulatory landscape have greatly expanded the definition of “deferred compensation” to now include the issuance of stock options (and other equity-based compensation) by startups.  These rules have an impact on ISOs (incentive stock options), NSOs (non-qualified stock options), RSUs (restricted stock units), SARs (stock appreciation rights), and Preferred Interests (for LLCs).    The new rules have made clear that the old "rules of thumb" of valuing common stock as a percentage of preferred stock at the latest funding round will no longer be accepted.

The new rules impose significant negative consequences on improperly structured equity incentives issued by private firms. Of note is that the they affect BOTH employees and companies, with both tax and penalty consequences, from the date of vesting of the equity option, NOT the date of exercise.  This could leave employees with significant payments and liability before any benefits are received, and leaves companies subject to both government liability and staff concerns.

Increasingly, the scope of section 409A regulation and startups' compliance with valuation requirements has become a focus of acquirers and regulators as companies mature.  Acquirers are looking closely at compliance with section 409A to understand potential future liability and possible litigation with staff, and have been forcing targets to cancel and re-issue stock options where liability was in question (at the expense of the startup), as well as knocking significant amounts off the purchase price of the company.  Any company that enters the 24-month window prior to IPO will find increasing regulatory scrutiny from the SEC and other regulatory bodies for consistency and compliance in the valuation of stock and stock options, with serious implications for any IPOs or other stock offerings.  

These and other considerations point to the value, in light of the cost-benefit calculation, of getting things right from the start and creating a consistent process for valuation. 

Sanjay Gandhi and David Lipa of Roebling Partners will be presenting. This event is organized by Michael, the New York co-curator of Startup Digest in collaboration with Adam Dinow at Wilson Sonsini.  

Preliminary Agenda: 

Note: you will have time before and after the presentation to mingle and network