Equitybee is partnering with UI Charitable, a Donor-Advised Fund sponsor built for the way startup employees and founders actually hold wealth. The two companies solve different ends of the same problem. Equitybee helps you unlock the value of startup equity. UI Charitable helps you give from illiquid and private assets. This post is about the second one, and why it matters most in the year your equity pays off.
The 409A valuation is not a good indicator of a company’s true value.
You heard me right. The 409A valuation isn’t an accurate representation of how much the company you work for is actually worth.
For those not familiar with it, the 409A valuation is an IRS required independent appraisal of the fair market value of a private company’s common stock. In short, the 409A valuation determines your options’ strike price – or the price at which a company can grant stock options – which ultimately facilitates your opportunity to become a shareholder.
At first glance, this valuation may seem like a useful tool to figure out the market value of your options – and even measure the current success of your company. However, if you dig just a little bit deeper, you’ll find that the 409A valuation does not accurately reflect the market value of your equity. And, if startup employees don’t know the market value of their options, they’ll be unequipped to leverage their equity to take control of their financial futures.
When companies are growing, they are focused on creating value for their shareholders, or in other words increasing the value of the company and shares.
However, when it comes to appraising the company for the 409A valuation, in order to benefit, retain and attract new employees, they are incentivized to decrease – not increase! – their 409A valuation. Why? Because this valuation will ultimately serve as the strike price for their employee stock options – and it is in the employee’s best interest for this valuation to be lower.
The lower the 409A valuation, the less money employees need to shell out when the time comes to exercise their options.
In fact, as a result of the recent market turmoil, many companies used the opportunity to lower their 409A valuation and made the news for doing exactly this: voluntarily slashing their valuations to benefit their employees.
Although news outlets ran these articles with sensationalized headlines such as “Stripe’s internal valuation gets cut to $63 billion” or “ Stripe Cuts Internal Valuation by 28%”, Stripe’s “slashed valuation” was for internal purposes: to benefit their employees and secure for them the best exercise price. It had no real impact on the market value of the company.
The real value of a company (and, ultimately, the value of its equity) is certainly not determined by the 409A valuation. The true company value is determined by what investors are willing to pay for it.
In order to obtain the market value of your options, you need to understand how much investors are or were willing to pay for company stock. You can obtain this information from either within your own company or via recent secondary trade data.
This is why we created the Equity Value Finder – to fill this knowledge gap and give startup employees a tool that will help them understand the actual market value of their options. Armed with this knowledge, they can make educated decisions about their options and take control of their financial future.
The Equity Value Finder ‘s estimate considers how much investors were recently willing to pay per share – resulting in a more realistic estimate of the fair market value of your stock options.
In fact, according to our data on U.S. based startups, the average Equitybee Estimate is 47% higher than the 409A value at the time of the transaction.
This is quite a variance between these two valuations – and is key information for startup employees to know in order to make decisions about their financial futures.
So, startup employees: do not solely rely on your 409A valuation to evaluate the worth of your options. The 409A valuation may seem like a useful tool to determine their value, but in most cases it’s mostly an irrelevant methodology that doesn’t accurately reflect the true value of your options.The real value is determined by what people are willing to pay for it – and the 409A valuation does not take this into account. The Equity Value Finder does.
If you’re a startup employee with stock options, it’s time to take control of your financial future by understanding the actual market value of your options.
What a Donor-Advised Fund actually is
A Donor-Advised Fund is a charitable account held by a sponsoring 501(c)(3), in this case UI Charitable. Once you contribute assets, you no longer legally own them, which is what makes the deduction work. What you keep is advisory privilege. You advise how the funds are invested, when assets are sold, and which charities receive grants over time. The deduction happens in the year you contribute. The giving to actual charities happens on the timeline you advise, with no required distributions in any given year.
Stage two: this is where UI Charitable is different, and where it fits startup employees
Here is the part that matters for the way you specifically hold wealth.
UI Charitable allows you to donate long-term appreciated assets such as public stock, private stock, cryptocurrency, etc. to a Donor-Advised Fund, and receive a tax deduction equal to the fair market value of those assets. Startup employees are exactly the people whose appreciated wealth sits in private and illiquid form. UI Charitable can serve the asset class most of the giving world cannot.
One important boundary
To be clear about what does and does not apply. You cannot donate shares that are covered securities by the Equitybee agreement and received by using Equitybee stock option funding. You can, however, donate other appreciated assets to UI Charitable.
*This is not tax advice. Consult a qualified tax professional regarding your specific financial situation.
Case Study: A startup employee in California
How does it actually work? A side-by-side comparison of a startup employee in California.
This same example would work for any appreciated asset donated in-kind.
Startup employee in California
Salary: $350K • Private share value: $1M • Shares donated to a Donor-Advised Fund: $300K (30%)
Getting started
get started with UI Charitable by visiting https://www.uicharitable.org/equitybee
