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The 409A Problem
During the fall of 2005 the IRS issued new regulations (Internal Revenue Code Section 409A) that required private companies to establish that stock options were not being issued "in-the-money" or below "fair market value" as defined in IRS Revenue Ruling 59-60. To avoid an additional tax event and potential penalties, a formal "valuation opinion" is required every 12 months, or more often if there is a material change in either the business or the implied market value of the common stock. The determination of fair market value can be made in several ways, but many venture capital-backed companies seek an opinion from an independent expert, such as SVB Analytics.

Benefits of an Independent Valuation
There are many reasons to choose an independent expert:

An opinion from an independent, third-party shifts the burden of proof for "reasonableness" from the company to the IRS
An outside valuation firm can provide useful assistance in the event the IRS or outside auditors question the methodology or results
Valuations can be time-consuming. Corporate management teams have limited time to spend away from the critical path of product development and revenue generation

As a wholly-owned subsidiary of SVB Financial Group, SVB Analytics benefits from its affiliation with an institution that has more than 25 years experience working with technology and life science companies, and their investors. Access to this breadth of knowledge, information and experience means SVB Analytics can produce higher quality valuations. Even though a company may have other relationships with SVB companies, SVB Analytics is deemed an independent third-party for the purpose of compliance, under the Internal Revenue Code §409A and is considered a Qualified Appraiser.

SVB Analytics Methodology
SVB Analytics determines the fair market value of the common stock for 409A compliance using methodologies based on the AICPA valuation standards and the IRS requirement to consider "all relevant facts and circumstances." These include asset-based, income and market-based approaches to determine the enterprise value of a company. This enterprise value is then allocated to the various classes of stock, taking into consideration all the rights and preferences of the preferred issues, resulting in a value of the common stock.

SVB Analytics is a non-bank affiliate of Silicon Valley Bank and a member of SVB Financial Group. Products and services offered by SVB Analytics are not FDIC insured and are not deposits or other obligations of Silicon Valley Bank. Silicon Valley Bank is a member of the FDIC and the Federal Reserve and it is the California bank subsidiary of SVB Financial Group, which is also a member of the Federal Reserve.