March 24, 2020
COVID-19 and Its Impact on Valuations
Posted by COVID-19 Rapid Response Team
With the Coronavirus-induced downturn in the stock markets, the valuation of many private and public companies has fallen substantially.
And while public companies may still rely on their traded prices to determine the value of a share of stock, private companies must rely on their 409A valuations to grant equity awards, or they must determine the value for tax purposes upon exercise or vesting of stock awards. However, these valuations are likely out of date and cannot be used for this purpose anymore.
For private companies, this creates a dilemma as values are changing so rapidly, new 409A valuations may be out of date before they are even completed. Careful consideration of the timing of valuations, and valuation methodologies is key. In either case, companies may find themselves in a situation, reminiscent of the great recession of 2008-2010, where outstanding stock options are worthless as a retention and reward tool for employees.
Some of the questions we’re hearing related to stock options include:
- Would the solutions of 2008-2010 work for companies in 2020?
- Would stock option repricings be a solution?
- What if the market fluctuation isn’t fully baked and employee options become worthless again?
- Would an exchange of equity instrument still work today?
- What about the accounting charge and the impact on financial statements?
- What about dilution?
Much of the above can be detrimental to a company and have a significant impact on earnings.
For public companies, repricings or exchanges generally must be done by way of a Tender Offer, which takes time, planning and can be expensive. For private companies, the same may be true depending on the number of employees involved. In either case, working with a knowledgeable equity compensation specialist is key to avoid the various pitfalls that can occur.
We’re Here to Help
With Armanino’s team of highly experienced equity compensation consultants and valuation specialists, we can help you understand how the recent environment is impacting your organization. We can help you develop an approach to support pragmatic, thoughtful decision making, as well as develop a game plan that fits your specific needs. Reach out to our COVID-19 Rapid Response Team if you have any additional questions or need support.
These are unprecedented times. And we know you, your families and your organizations need support, now more than ever. Our top priorities as your trusted advisor is to ensure we’re helping you through these tough times. Visit https://www.armaninollp.com/articles/covid-19-resource-center/ for our Crisis Management Resources and contact information for our COVID-19 Rapid Response Team Leaders.