The enactment of Internal Revenue Code Section 409A has resulted in significant challenges for private companies that award employee stock options. Under the final Treasury regulations, stock options that are awarded with an exercise price less than the fair market value of the underlying stock on the date of grant (“discounted stock options”) constitute deferred compensation and will typically result in adverse tax consequences to the option holder and tax withholding responsibility for the awarding company.

In “Pricing Private Company Stock Options to Avoid the Pitfalls of IRC 409A,” Manatt summarizes the valuation requirements under the 409A Treasury regulations as they relate to pricing private company employee stock options. The general valuation parameters provided in the 409A Regulations are summarized in this guide as well as three specific valuation methods that, if utilized, create a presumption of reasonableness.

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