Last year, a $100 million in SaaS revenue could have brought you a $5.7 billion valuation based on Snowflake’s 2021 multiple of nearly 57x. But now, with a multiple of 15x, your company will only be valued at $1.5 billion. The impact on your company’s common stock, and the 409A valuation, is clear.
As noted above, all of these factors and related multiples have a major impact on a company’s common stock valuation. If your current 409A was last updated between March 2021 and March 2022, you are very likely being compared to multiples that are no longer relevant.
This means reevaluating your 409A now is actually the right thing to do for your employees, because their equity isn’t up to date with the rest of the market.
Again, equity is meant as an incentive and a reward for joining an early-stage company and putting in the hard work to take it public. But that incentive is lost if the cost to invest — because that’s what stock options are — is out of reach to begin with.
In addition, individuals exercising their options now will have to pay tax on the difference between their strike price and the 409A. This is real money they won’t get back. Paying unnecessary taxes is not just a waste, it could also mean your employees are paying more for their stock than it’s actually worth, effectively putting their stock underwater.
What about employees who may already have a strike price that could be higher than a new 409A? This is another key reason to reassess your 409A, because you can easily reissue that stock back to them at a lower strike price. This gives them a more attractive equity package, while showing them the effort you’ve made to put them in a better position.
The best founders and CFOs will do the right thing for their employees by making sure they are rewarded fairly, don’t pay more taxes than are necessary and have aligned their incentives with the company’s success. It’s time to talk to your 409A evaluator and ensure you are doing all you can to help your employees.