409A is a section of the Internal Revenue Code. A 409A appraisal provides a “safe harbor” from punitive taxation of options issued to employees. An appraisal provided for financial reporting in accordance with ASC 718 “Compensation – Stock Compensation” may be referred to as a “409A appraisal,” even though tax reporting and financial reporting are different.
Once a year, unless there is a value-changing event, such as an equity financing.
A company may finance its assets with capital raised from its investors and borrowed money. Equity value is the value of ownership interests. The market value of invested capital (MVIC) is equity value plus debt. Enterprise value is the value of MVIC less cash. It corresponds to the value of the company’s non-cash assets. To illustrate, in a company with an equity value of $100, $25 in debt and $30 in cash, the MVIC is $125, and the enterprise value is $95.
When a company raises equity capital, it sells a percentage interest in its equity to investors. The company’s pre-money value determines what percentage is sold for a given amount of investment. The post-money value is the sum of the pre-money value and the amount raised. To illustrate, a company that sells a 25% equity interest for $5 million has a pre-money value of $15 million and a post-money value of $20 million. The amount raised ($5 million) represents 25% of the post-money value.
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