Employee Stock Options, Third Party Warrants and Other Derivative Securities:
The issuance of employee stock options, third party warrants and other equity-linked instruments trigger the need for a variety of valuation opinions. Options granted to employees allowing them to purchase stock in their employer at a stated price in the future must be valued as of the grant date for financial reporting purposes in connection with both FASB ASC 718, Compensation – Stock Compensation and FASB ASC 815, Accounting Standard for Derivatives & Hedging. In addition, for tax purposes, the exercise price for employee stock options (as well as stock appreciation rights) must not be less than the fair market value of the underlying stock in order to avoid being taxed as deferred compensation under IRC Section 409A, which regulates the treatment of “nonqualified deferred compensation”.
When equity-linked instruments, such as warrants, preferred stock and convertible debt of a non-publicly traded company are issued to lenders in conjunction with debt financing, a portion of the proceeds must be allocated to the securities. Not only must these securities be valued initially on the date of issuance, but must also be valued periodically for financial reporting purposes in connection with FASB ASC 470-20, Debt with Conversion and Other Options, as well as FASB ASC 718, FASB ASC 815. Such an analysis requires a determination of the fair value of equity shares along with an allocation of the company’s capital between debt, equity, and the derivative securities.
Cogent Valuation has significant expertise in the valuation of stock options, warrants and other equity-linked securities, and specializes in the valuation of securities of companies with complex capital structures. Our clients, their audit teams and tax advisors vast experience with the allocation of the equity and debt classes to determine reasonable and reliable valuations of options and other equity-linked instruments.