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I understand the founder argument. "Our investors said our valuation was $XM, so we give you your stock grant based on that price." But, the investors don't take normal stock. They demand special ("preferred") stock with more voting power that can get paid first - before employees. So, the $XM valuation isn't fair between the different stock levels, and the employees are at the bottom of the food chain - most likely to walk away with nothing. Startups typically give their employees stock or options, and how you price the stock has tax implications. So, the IRS strongly suggests that you do something called a 409a valuation, where a neutral 3rd-party professional accounting firm determines the value of each stock type in your company. So, if your startup valuation is Schrodinger's Cat, then the 409a process is intended to have some trusted third party open the box and see what's happening. The problem arises when you report one valuation to the IRS, and another to employees. You can't keep two different sets of accounting books, and you can't represent two different sets of valuations at the same time. By having the third-party accounting firm issue a valuation and by issuing stock at that valuation, you're supposed to have eliminated uncertainty in your stock price - and if you haven't, then the tax treatment of your grant is at risk. That duality is made clear when your offer letter says "$X" and the stock grant says "$<X". That's dishonest and potentially fraud. You can say "Your stock is valued at $X based on a $Y liquidity event, and $Y is the post-money valuation of our last round of funding." But, that's not the same as "We advertise your stock as worth $X (but, shhh, that's not what we tell the government so keep it a secret)." |