Mind the gap: 409A vs HMRC company valuations

Mind the gap: 409A vs HMRC company valuations

Author: Scarlett Pierce
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Read time:  5 minutes
Published date:  30 January 2023
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Updated date:  21 February 2024
What sets a 409A valuation apart from a company valuation for EMI or CSOP? Find the answer in this Capdesk guide.

Picture this: your employee share scheme is all but ready to launch. If you’re issuing equity under an HMRC-approved scheme, you need a valuation. If you’re issuing equity to employees who are subject to US tax law, you need a 409A valuation.

At some point in your research, however, you discover that each instance requires its own kind of company valuation, and that the two cannot be combined. Considering a valuation takes time and effort to produce – as well as money if you’re outsourcing any part of the process – this is bound to be disappointing news.

Given you’re essentially doing the same thing – calculating a reasonable price per share at which to issue employee equity – you might ask: why do I need two company valuations, when I’ve only got one company?

In this article, we’ll explain the differences between  409A valuations and  HMRC valuations, from the methodology right through to the output. We’ll also cover what would happen if you decide to use one kind of valuation for both instances (spoiler alert: it’s not a good idea).


Why are company valuations done differently in the US and the UK?

Time for a quick history lesson. Back in 2001, American energy giant Enron was exposed for misrepresenting its financial records and artificially hiking its share price to the benefit of Enron shareholders and senior employees. In the wake of this scandal, the US introduced much stricter tax regulations under section 409A of the Internal Revenue Code.

Now colloquially known as a 409A, a US company valuation is about as regulated as you can get, which means you can’t justify a low strike price as easily as other jurisdictions.

By contrast, HMRC offers a number of tax-incentivised schemes in order to boost the usage of  Employee share ownership plans (ESOPs) in the UK. Because HMRC is keen to incentivise option schemes in the UK and make them accessible for employees, it takes a less prescriptive approach.

As a result, a 409A valuation can produce a much higher price per share than an EMI valuation, even when performed for the same company at the same moment in time.

What are the differences in 409A and HMRC valuation methodology?

First, let’s cover what the two valuations have in common. Broadly speaking, the data inputs needed are the same, regardless of what side of the pond you’re dealing with. The calculations are very similar too. 

However, HMRC considers all the ways employee share options vary from ordinary voting shares as reasons to discount the share price. This includes the structure of the share scheme and any political or economic restrictions on the option grant. When designing a share scheme, companies often create share classes just for employee shares, which may have certain restrictions such as no voting rights. The more restrictions, the higher the discount on the share price.

Another difference in the process of performing a valuation for HMRC is the ‘information standard’. The information standard assumes that, unlike most employees, shareholders with influence have access to more financial information than is publicly available. As a result, you may need to disclose less on the valuation report.

That said, it’s not that performing a 409A valuation is simpler – in fact, it’s probably more complicated. The 409A process stipulates Black-Scholes option price modelling, a mathematical model which calculates the theoretical value of an option. This model incorporates timing assumptions (time value of money), volatility assumptions (daily stock price movements), and a risk-free rate. All else equal, this will always lead to a larger 409A value because it takes future exit events into account.

Why do I need pre-clearance from HMRC but not from the IRS?

Strictly speaking, you don’t need pre-clearance from HMRC in order to issue EMI options – it’s more strongly recommended for CSOP schemes – but you are exposing your business and its employees to significant tax risk if you skip this step. 

HMRC pre-clearance acts as an insurance policy for your employees, because their option grants won’t be subject to interrogation in the future, such as at the point of exercising. For your business, it avoids the possibility of any tax liabilities emerging in a due diligence process that could potentially damage a sale.

For a 409A valuation, however, you can’t get approval in advance. But when your company reaches a certain size and starts doing yearly audits (if it’s not already at that point) you’ll need to show evidence of your past company valuations being produced compliantly.

Can I use my 409A valuation for my UK share scheme?

Technically, yes, you can use your 409A valuation for a UK share scheme. But you’d be doing your employees a considerable disservice. As we explained earlier, the price per share determined by a 409A valuation can be many multiples higher than that produced for an EMI or CSOP scheme in the UK. 

If you fail to factor in all those additional discounts that an EMI scheme is eligible for, you’re simply setting the barrier to entry much higher for any employees ever wanting to exercise their options. Companies seeking to reconcile the difference in share price for their US and UK employees should look at other ways to ‘even the playing field’, such as vesting schedules and grant sizes. 


There you have it, a straightforward explanation of what separates these seemingly identical processes. 

Why choose Carta for valuations?

An integrated solution: When you sign up to Carta, we upload all your company data onto our platform, so you can manage your equity and valuations in a single system.

In-house expertise: Your valuations are performed by our own experts, never outsourced to a partner or third party.

HMRC and IRS support: Let us do the boring stuff for you. We’ll even liaise with tax authorities in the UK or the US on your behalf.

Leading providers: You’re in good hands. Carta is the world’s leading provider of 409A valuations, performing thousands each month.

Discover more about Carta's valuations services.
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