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The Ticking Time Bomb in Startups’ Books

There’s often tension between a private tech firm and its accountants over 409A stock option valuations. If set too much below a company’s market value, the IRS might come calling. If set too high, employees might not be happy as their upside would be less.

But those tensions could surface more this year if a wave of acquisitions emerges, as some expect if the funding climate gets tougher. That’s because past 409A valuations get examined by potential buyers of companies in due diligence. If suitors come across any valuations that look too low, potentially causing a problem in any later IRS audit, they can back out of a deal. Alternatively, the buyer could require the company to cancel and reissue options which could be costly and take lots of time, company valuation experts say.

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