The Real Impact of 409a

I haven’t posted much on the IRS regulations (called 409a) that are forcing most of our portoflio companies to spend time, energy, and money getting third party valuations done of their common stock to ensure that their employees don’t end up with tax liabilities.

Brad Feld is the "axe" on this issue having posted on it no less than 14 times so far.  So if you feel like you need to get up to speed on this issue, you should read his posts.

We’ve taken the safe route and the vast majority of our portfolio companies have hired third party valuation consultants to determine the fair market value of the common stock which is the price the options get struck at to insure that there are no tax liabilities for the employee upon issuance.

And guess what?  Most of the valuations that have come in so far have been lower than the fair market values previously determined by the companies and their boards.  It’s counterintuitive but when you think about it the boards have erred on the side of being conservative and the consultants are working for the companies and trying to please them.

So the IRS has handed a gift to the companies and their employees in the form of lower strike prices. Thanks, we’ll take it.

Chalk it up to another case of regulators seeing a problem where none existed and actually creating one in an effort to fix the non-problem.