
409A as a Service: Cash Cows Get Slaughtered - pdq
http://siliconhillslawyer.com/2014/03/15/409a-service-cash-cows-get-slaughtered/
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ChuckMcM
God this is an insanely good idea. Not only do you solve a real pain point for
startups (the whole 409a eval) but if they sign up and feed you monthly
updates on their financial position you could massively front run the market
on what startups were going to pop and which were going to expire quietly.
Google thinking about acquiring your startup? Lets have a look at the other
six companies in your space for which is the right one to grab and for how
much. Ka-CHING!

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pendevere
Hello -- founder of Preferred Return (the valuation firm behind this offer
that is partnered with eShares) here. As appraisers we cannot own equity or
any economic rights in the companies we value.

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ChuckMcM
That makes perfect sense, but it isn't owning equity in the companies that is
valuable, rather it is the knowledge of both the current value and change in
value of a material number of startups in a particular space.

Today there are a number of research companies that use this exact same
information, as reported by public companies as part of those company's
obligations to the SEC, to evaluate investment risk and opportunity. Their
services go from 'free' (as in Charles Schwab will send you a copy of their
research department's report on a company or a segment if you're an account
holder) to 'extortionate' which some of the larger trading houses keep in
their back pockets to help them pick winners and losers.

As a collection point for this information about _privately_ held companies,
it puts you in a nearly unassailable position to do research on which of these
companies are likely to be successful or not (your own sort of buy/hold/sell
ratings) This isn't even possible today because, as the article mentions.
everyone goes to different places to get their 409A valuations. So no single
entity has enough of the puzzle to assemble a recognizable picture, yet by
offering this valuation service, and attracting a very large number of
customers, you create the opportunity to be that single source of information.

I would venture a guess that there are venture capitalists that would pay
handsomely for a 'peek' at the state of the industry 'yet to come' as it were.
That would not involve you (Preferred Return) owning any equity in any
company, all you'd need to do it offer up research reports at $500,000 a copy
describing the state of the industry :-)

I am in awe of how amazingly clever this whole scheme is!

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pendevere
Because we want to continue to run a respectable business, and staying in
business depends on our clients trusting us, we have no incentive to pursue a
data-based revenue model. We are a service provider, like an accountancy or a
law firm, not a software or data company.

To do what you propose would involve trading our large, primary revenue stream
for an untested one-shot reporting product that would be extremely unpopular
with everybody and put us out of business overnight. It makes little sense to
me. You draw analogies to public markets, but there's a reason private
companies are called private companies.

In addition to our standard engagement terms that forbid such use of client
data, we are happy to sign customer NDAs and regularly do so. We have never
earned a cent from client data and have no intention of doing anything of the
sort.

Happy to discuss over the phone if you have any further suggestions on this
front.

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ChuckMcM
Pendevere, email me. Address is in my profile.

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Orangeair
With the 2048-as-a-service thing earlier, I thought at first that this was
just a misspelled attempt to try to one-up them.

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danielweber
Ironically meta, considering how Threes was accused of being a clone of 2048.

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chasb
There are many legal/legalistic-type assurance and regulatory frameworks that
can be automated, in significant part. I work in a compliance-as-a-service
startup (HIPAA specifically, to start). It's absurd how much mediocre
consultants and lawyers make doing work that is mostly boilerplate.

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carbocation
Any chance you'd be interested to link to your startup in this thread? You've
piqued my interest.

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chasb
Aptible ([https://www.aptible.com](https://www.aptible.com)). I'm Chas - email
me at chas@aptible.com if you'd like to chat. Honest advice is always free, if
you're looking to work in healthcare and want to get your bearings. That goes
for anyone.

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No1
From the article: "at the early stage, these valuations are generated in an
almost entirely automated fashion."

I'm curious, anyone know what the typical formula is?

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henward0
Take a look at the top voted post on Quora about 409A valuations.

[http://www.quora.com/409A-Valuations/What-is-a-good-firm-
I-c...](http://www.quora.com/409A-Valuations/What-is-a-good-firm-I-can-use-to-
get-a-409A-valuation-for-my-startup)

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csense
Doesn't the IRS need some algorithm to determine the fair market value of your
shares? I see two different possible answers to this question:

\- The IRS doesn't use such an algorithm. In this case, how can an IRS audit
overcome the "there's no evidence we acted incorrectly, the IRS is just
picking on us" defense? If there's no objective standard, how can the IRS ever
figure out if anyone's valuation's too low?

\- The IRS does use such an algorithm. In this case, what's preventing
companies that issue the shares from just using the same algorithm the IRS
uses?

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danieltillett
They do - they basically all use the Black-Scholes Model [0] and just plug in
the numbers.

I assume most of the cost of these 409a's is for the backside covering aspect
- if the IRS says how did your come up with your pricing you can point them in
the direction of someone "serious" and blame them if they typed in the wrong
numbers.

[0]
[http://en.wikipedia.org/wiki/Black–Scholes_model](http://en.wikipedia.org/wiki/Black–Scholes_model)

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yesimahuman
Thank god. I'm going through this right now, and all it's done is keep us from
issue options and getting an advisor on board, for almost a month now. I'll do
anything to make sure we never have to deal with that again.

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rdl
Thank you! This was a horrible tax on startups -- not just the cost, but the
cognitive load before every transaction, and sometimes delaying grants or
onboarding at (not very well run) companies due to confusion.

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shivaas
Brilliant!! Like how the landing page explains the fees clearly and how it
works.

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danieltillett
Does anyone here know if there is an equivalent to 409a in Australia?

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lhgaghl
I can't see the page, says "403 forbidden"

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erichurkman
Do you mean the blog post on
[http://www.siliconhillslawyer.com](http://www.siliconhillslawyer.com) or the
links to [https://www.esharesinc.com](https://www.esharesinc.com)? Both seem
to be working fine for me.

