Situation
A bright and ambitious college student started working in the medical device and development sector while in college to make some money in a sales role. After college, he worked as a consultant for a medical device manufacturer, continuing to learn the business and industry.
He launched his own business selling a medical device he developed targeting health practitioners of patients with a specific medical condition. His knowledge of the industry and his natural ability to build relationships propelled the business to significant growth within five years.
The entrepreneur had an employee who was instrumental in the success of the business and he wanted to reward him with equity in the business. He was advised that to do this he needed to comply with Section 409A of the United State Tax Code affecting businesses who offer non-qualified deferred compensation plans including issuing stock options and compensating employees in stock. To be compliant he would need a business valuation and would need a professional who had the expertise in 409A valuations. Through an online search he found Merrimack Business Appraisers and President, Lou Pereira.
Merrimack Business Appraisers’ Approach
Pereira was impressed by this entrepreneur and the successful medical device business he had built. As a certified business appraiser, Pereira commonly prepares business valuations for tax related needs including 409A valuations required for tax compliance.
As a business valuation professional, Pereira developed a thorough and objective business valuation of the medical device company based in Massachusetts. He then applied the required discounting to account for lack of control and marketability of the equity being granted as restricted stock to the employee.
Valuation Outcome
As an objective party, the valuation completed by Merrimack Business Appraisers satisfied compliance with Section 409A of the US Tax Code determining the value of the restricted stock to be reported as part of the employee (the recipient’s) taxable income. The entrepreneur was able to reward his employee with stock in the growing business and have peace of mind that he was in compliance with Section 409A.
Learn more about 409A valuations.
When Values Matter.
