What is Fair Market Value(FMV)?

Fair Market Value (FMV) is defined as the price at which an asset can be sold in an open market by a willing seller and willing buyer, where neither is being coerced to do the deal, and each is fairly informed about the transaction. It is a fundamental principle in the areas of accounting, finance, and taxation, applicable to all types of valuations of all kinds of assets.

The essential element of Fair Market Value is its reflection of a true arm’s-length transaction price and not a distress price or any arbitrary figure based on sentimental or strategic value of the asset to a specific buyer.

What is Fair Market Value Stock?

The term ‘fair market value stock’ refers to the fair market value attributed to stocks. It especially pertains to stocks from a private corporation. While stocks from public companies are easily determined through the market price, those from a private company need a valuation process to determine their fair market value.

For instance, when the stocks of a private company are worth $10 each, then that can be regarded as the fair market value of the stock.

FMV Importance for Private Companies’ Shares

There are some main reasons why FMV is essential for startups and private companies:

• Pricing of stock options: Shares of stock provided by companies to their employees are usually priced no lower than FMV to avoid tax problems
• Tax compliance: According to IRS requirements, a private company should have a reliable FMV before issuing stock options; otherwise, there could be penalties from the IRS
• Investor/broad reporting: FMV provides the founder, investors, and the board with a single metric for estimating the company’s current value
• Employee compensation: FMV impacts the value of equity compensation provided to employees

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