The IRS recently threw down the gauntlet and placed pressure on private companies to get their valuations right at no matter what stage of development they are. The Service has backed up this gesture by exposing private companies to substantial tax liabilities and penalties if they do not.

Since the enactment of Section 409(A), non-public companies have struggled with how they should establish that the exercise price of a stock option or a stock appreciation right (SAR) was determined reasonably to be fair market value.