Why a Down Spherical Forces a New 409A
A 409A valuation after a down spherical must be redone, as a result of the priced spherical is new materials data the prior report by no means noticed.
Treasury Reg. 1.409A-1(b)(5)(iv)(B)(1) counts “current arm’s size transactions involving the sale or switch of such inventory or fairness pursuits” among the many elements an affordable methodology has to weigh. It additionally says a beforehand calculated worth isn’t affordable later if it “fails to replicate data out there after the date of the calculation which will materially have an effect on the worth of the company.”
That take a look at and the 12-month outer restrict are impartial disqualifiers joined by “or.” A four-month-old report remains to be unusable as soon as the spherical costs.
What goes away is the protected harbor. The presumption of reasonableness at 1.409A-1(b)(5)(iv)(B)(2) is rebuttable solely on a displaying that the tactic or its utility was “grossly unreasonable.” Outdoors it you defend your personal methodology towards a signed buy settlement displaying a cheaper price.
The occasion is the pricing, not the closing. Grants made between a signed time period sheet and an in depth three months later worth off a report that not displays out there data, so freeze grants till the refreshed one lands. For the total material-event checklist and the cadence query, see when to refresh your 409A.
The brand new report often concludes a decrease frequent truthful market worth. It doesn’t need to. Widespread inventory worth isn’t the popular worth, it’s an allocation output, and a down spherical strikes a number of of these inputs directly.
Complete fairness worth falls. A backsolve to the brand new, decrease most well-liked worth pulls the entire allocation down, which is why frequent often falls.
The desire stack can develop. A senior collection, collaborating most well-liked, a liquidation a number of, or full-ratchet anti-dilution raises the strike on frequent’s name choice, so frequent falls additional than the headline low cost.
The desire stack can shrink. In a pay-to-play or cram-down recapitalization, prior most well-liked converts to frequent and loses its liquidation desire, which might elevate per-share frequent worth though the popular worth fell.
Time to liquidity and volatility transfer. Each elevate the choice worth of frequent.
So no one can quote the quantity earlier than the allocation runs. Your down spherical 409A engagement ought to open with the total capital construction on the desk, desire phrases and recapitalization mechanics included, as a result of these are inputs and never footnotes. When indinero scopes a refreshed 409A, that’s the primary ask. See 409A valuation methodology for the allocation and our information to most well-liked shares for the stack.
What Occurs to Choices Granted on the Previous Strike Worth
Nothing occurs mechanically to choices granted on the outdated strike worth. An train worth is mounted at grant, and a later 409A report doesn’t contact it.
There’s no deemed modification, no tax occasion, and no accounting occasion for both facet. The grant was compliant when made as a result of the strike met truthful market worth on the grant date beneath 1.409A-1(b)(5)(i)(A)(1), and that take a look at runs as soon as.
The choice simply stops working as compensation. Three results observe.
It’s value nothing on train. An worker holding a $4.10 strike towards a brand new $2.30 truthful market worth would pay $4.10 for what your personal appraiser values at $2.30. Rational holders don’t train, they usually don’t forfeit both, as a result of the choice nonetheless carries time worth. So the grants sit on the cap desk consuming the pool, with no retention impact and no money. The corporate retains expensing the unique grant-date truthful worth, as a result of ASC 718 expense doesn’t reverse when an award goes underwater.
New hires get a greater deal than the individuals who stayed. Each grant made after the refreshed report costs on the new decrease truthful market worth. The engineer who stayed by the spherical holds a strike the candidate beginning subsequent month can’t be given, and the hole widens with tenure.
The hole exhibits up as job search. A 2005 Personnel Psychology research of 610 U.S. executives, “Out-of-the-Cash: The Impression of Underwater Inventory Choices on Govt Job Search,” discovered a constructive affiliation between the share of a portfolio underwater and job search exercise.
Underwater inventory choices aren’t a tax drawback for the holder, and management ought to say so plainly within the all-hands. The true failure mode is the founder who guarantees a reprice earlier than the board has run the evaluation. That promise is itself an “supply to grant” drawback beneath ASC 718-20-35-8. Say what you’re evaluating, not what you’ll do.
For the query that follows each down-round all-hands, why frequent trades under most well-liked, see our information to frequent inventory.
The Repricing Route and What It Prices
A straight reprice lowers the train worth on present choices to the present 409A truthful market worth and modifications nothing else. Similar share rely, identical vesting, identical expiration. It’s the choice repricing startup boards contemplate first, and it typically wants no holder consent, as a result of no holder is made worse off.
A reprice isn’t only a worth change. Underneath 1.409A-1(b)(5)(v)(A) a modification “is taken into account to be the grant of a brand new inventory proper,” and (b)(5)(v)(B) reaches any change which will give the holder a “direct or oblique discount within the train worth … no matter whether or not the holder in actual fact advantages.”
The sequence is mounted, and the order is what will get firms in hassle.
Get the refreshed 409A first. The brand new strike has to clear truthful market worth on the modification date, not the unique grant date and never the date the board began speaking about it. A decision dated forward of the valuation report is an issue your auditor will discover. Our 409A engagement timeline covers how lengthy that takes.
Affirm plan authority. Most plans give the board modification authority broad sufficient to cowl a reprice. Some prohibit repricing with out stockholder consent, and investor rights agreements, voting agreements, and credit score agreements can every impose consent necessities of their very own.
Take board motion. The decision names the brand new train worth, the eligible inhabitants, and the efficient date. Administrators are approving a switch of worth from most well-liked holders to choice holders, so the minutes ought to carry the enterprise rationale.
Take a look at whether or not stockholders need to vote. Non-public firms typically don’t want approval for the reprice itself. The pool top-up is completely different. Underneath 26 CFR 1.422-2(b)(2)(iii), growing the utmost combination variety of shares issuable beneath the plan is the adoption of a brand new plan requiring stockholder approval.
Run the tender supply evaluation. A uniform strike discount with no election isn’t a young supply, as a result of there’s nothing to tender. Give holders a selection and the window math under applies.
Doc it. Amended agreements go to holders, the cap desk will get up to date, and the audit file takes the valuation report, the decision, the truthful worth computation, and the plan authority evaluation.
Possibility Exchanges and Cancel and Regrant
A inventory choice alternate program cancels underwater choices and points one thing else of their place. Corporations decide this over a reprice after they need to change greater than the value.
The third path is neither. Depart the underwater grants alone and difficulty new choices on the new decrease truthful market worth. No modification, no incremental truthful worth measurement, no ISO reset, no tender supply evaluation. The price is dilution, and it solely works if the remaining pool can take up a significant second layer.
Worth-for-value exchanges are the market norm
One-for-one exchanges have change into uncommon, pushed out by shareholder opposition and the ASC 718 price. Present follow gives fewer alternative choices on the present worth, so what the worker receives is value not more than what they gave up and incremental truthful worth beneath ASC 718-20-35-3 lands close to zero.
Moderna’s late-2025 program is the totally documented model. Stockholders authorised it at a particular assembly on November 12, 2025, the supply ran November 13 to December 12, 2025, and a couple of,865 eligible holders participated. The corporate accepted choices over 4,328,461 shares, 79.9% of the shares underlying eligible choices, and granted replacements over 1,668,237 shares at $29.46 per the Schedule TO-I/A. Roughly 2.6 outdated shares surrendered for 1 new one.
Some packages swap choices for restricted inventory items, which maintain worth at any worth however create a withholding drawback at vest for a personal firm.
The alternate window is narrower than it appears
Rule 13e-4 doesn’t attain a personal firm, as a result of 13e-4(a)(1) limits it to Part 12 registrants, Part 15(d) filers, and registered closed-end funds. That isn’t the top of the evaluation. Rule 14e-1 sits beneath Trade Act Part 14(e) and reaches any tender supply, so a private-company alternate with an worker election is one, and 14e-1(a) bars holding it open “for lower than twenty enterprise days.”
Now the ceiling. Underneath 26 CFR 1.424-1(e)(4)(iii), a suggestion to alter choice phrases that stays excellent for 30 days or extra modifies the choice as of the supply date, together with each eligible incentive inventory choice held by workers who decline. Twenty enterprise days is roughly 28 calendar days, so the compliant window is slender by development. Run the supply for 35 days to be beneficiant and also you silently convert ISOs for individuals who by no means participated.
Cancel and regrant, and the six-months-and-a-day conference
Ready six months and a day between cancellation and regrant is outdated practitioner conference, not a rule in ASC 718. It descends from FASB Interpretation No. 44 beneath APB Opinion No. 25, which handled a lower-priced grant inside six months of cancelling a higher-priced one as an oblique repricing and triggered variable accounting. That regime ended with ASC 718.
Present GAAP has no brilliant line. ASC 718-20-35-8 captures a cancellation accompanied by the concurrent grant of, or supply to grant, a alternative award, and the take a look at is concurrency plus whether or not the worker would view the brand new award as a alternative. An announcement or a documented plan hyperlinks the 2 occasions whatever the calendar hole.
There isn’t a ready interval.
The hole additionally prices you twice. The individuals you’re retaining maintain no choice in any respect within the meantime, and 26 CFR 1.422-4(b)(5)(ii) retains the cancelled choice counted towards the holder’s $100,000 bucket “till the top of the calendar 12 months throughout which it could in any other case have change into exercisable for the primary time.” So a February cancellation and an August regrant stack, and the surplus turns into nonqualified.
The Accounting and Tax Penalties of a Reprice
A reprice is a modification beneath ASC 718-20, and it creates incremental compensation price measured on the modification date. That price is the surplus, if any, of the modified award’s truthful worth over the unique award’s truthful worth instantly earlier than the change.
So that you want two truthful worth computations, each as of the modification date, one with the outdated strike and one with the brand new. The choice-pricing inputs are an identical throughout the runs. Solely the strike strikes. SEC employees correspondence quoting the paragraph describes it because the repurchase of the unique award by issuing a brand new one among equal or better worth, with extra price for any incremental worth.
For a personal firm the asset worth enter is the refreshed 409A frequent truthful market worth, so the valuation and the modification computation share a dependency. Run them at two corporations on two assumption units and the cost finally ends up disagreeing with the valuation report inside the identical audit file.
Incremental worth on the already-vested portion hits instantly. The unvested portion spreads over the remaining vesting interval alongside the unrecognized authentic grant-date truthful worth. So the form of the cost issues greater than the scale, and transferring the reprice throughout 1 / 4 boundary strikes the quick piece into a unique reporting interval. Mannequin that earlier than the board picks an efficient date.
The ISO penalties, within the order they get missed
The $100,000 limitation is retested. IRC 422(d) caps the combination truthful market worth of inventory, measured at grant date beneath 26 CFR 1.422-4(b)(2), with respect to which ISOs are first exercisable in any calendar 12 months. The repriced choice is a brand new grant, so the take a look at runs once more, with the modified choice nonetheless counted on its authentic phrases by 12 months finish.
The holding interval clock restarts. IRC 422(a)(1) requires no disposition inside two years from grant and one 12 months after switch, and the two-year clock now runs from the repricing date.
The plan’s 10-year grant window could also be closed. 26 CFR 1.422-2(c) requires an ISO to be granted inside 10 years of plan adoption or stockholder approval, so replacements deemed granted beneath an older plan can’t be ISOs.
Set the brand new strike under the brand new truthful market worth and 1.409A-1(b)(5)(i)(A)(1) fails, which makes the repriced choice nonqualified deferred compensation. The worker then owes revenue inclusion, premium curiosity on the underpayment price plus one proportion level, and a further 20 % of the quantity included. Our piece on IRS Part 409A penalties walks that stack. A reprice struck at precisely the brand new truthful market worth produces none of it.
SAS 143, codified at AU-C 540, names share-based funds among the many estimates in scope, so your auditor will take a look at the tactic, the assumptions, and the info behind each the refreshed 409A and the modification truthful worth. Write the memo the identical week because the board decision. See audit preparation for the remainder of the file.
Deciding Whether or not to Reprice, Trade, or Wait
4 variables resolve this, and they are often assessed in a single assembly.
Remaining pool. Headroom makes extra grants the most cost effective path administratively. With out it you’re selecting between a reprice, an alternate, and a pool enhance that goes to the stockholders. An alternate is the one path that returns shares to the pool, as a result of cancelling 2.6 shares to difficulty 1 creates headroom whereas fixing the issue.
Retention danger, named. The query isn’t whether or not morale is down. It’s which particular individuals can be laborious to switch inside 90 days. A reprice justified by a named checklist of twelve individuals reads very in a different way to an investor director than one justified by a sentiment survey.
Burn and runway. A reprice prices no money. It prices non-cash ASC 718 expense, and it prices most well-liked holders dilution-equivalent worth. That makes it the out there lever for an organization with tight runway, which is commonly precisely the corporate that simply priced down.
Audit timing. Taking the reprice and the down spherical in the identical audited interval means one valuation report, one modification memo, and one set of assumptions for the auditor to check.
The working sequence: shut the spherical, interact the refreshed 409A with the total capital construction in hand, freeze grants till the report is last, then mannequin all three paths towards the brand new truthful market worth. For every, compute the incremental truthful worth, the quick versus deferred cut up, the $100,000 retest on your prime 20 holders, and the pool affect.
None of that is venture-specific. A PE-backed firm that recapitalizes, a bootstrapped firm issuing a brand new most well-liked class to a strategic investor, and an owner-operated enterprise resetting its fairness plan after a nasty 12 months all run the identical evaluation and the identical modification math. The laws don’t ask who funded you. For entity-level context, see C-corp vs S-corp.
How Indinero Works By way of a Submit-Down-Spherical 409A
At indinero, the refreshed 409A, the ASC 718 modification cost, and the board package deal are one piece of labor, not three separate engagements. That issues extra right here than on a routine refresh, as a result of the three outputs need to agree with one another.
The valuation units the truthful market worth. The modification computation makes use of that very same quantity as its asset worth enter. The board package deal and the audit file carry each, with the identical assumptions and the identical dates. Break up that throughout three distributors and the failure mode isn’t that anybody of them is fallacious. It’s that the cost was computed off a unique quantity than the decision relied on, and the hole surfaces six months later within the audit.
Bookkeeping, accounting, tax, and fractional CFO bundled beneath one month-to-month engagement means the quantity is about as soon as and used in every single place. Steady operations since 2009, 500+ common clients.
Modification accounting is a judgment, not a components. Two option-pricing runs as of the modification date, a vested and unvested cut up, a recognition interval, and a memo an auditor can take a look at beneath AU-C 540. A CPA group that works in GAAP writes that memo within the week of the board decision.
The down-round framing is venture-shaped. The mechanics aren’t. Indinero works throughout PE-backed recapitalizations, strategic minority investments into bootstrapped firms, and plain fairness plan resets, not solely the enterprise path. Our 409A valuation companies web page covers scope, the important information to 409A valuations covers the total backbone, and 409A valuation price in 2026 covers what the work runs.
In case your spherical simply priced and no one owns the sequence from valuation to memo, that’s value a dialog earlier than the following board assembly.
Continuously requested questions
Three questions come up in each post-down-round board dialog, they usually’re value settling earlier than the reprice evaluation begins. Brief solutions under, every with the regulation or codification reference behind it.
Does a down spherical mechanically decrease our 409A valuation?
No, a down spherical requires a brand new 409A valuation however doesn’t mechanically produce a decrease frequent truthful market worth. Widespread worth is an allocation output, so a backsolve to the decrease most well-liked worth often pulls it down, and a much bigger liquidation desire stack pushes it additional. A cram-down recapitalization that converts most well-liked to frequent can transfer frequent up as an alternative. Indinero scopes a refreshed 409A with the total desire stack and recapitalization phrases in hand, as a result of these are inputs and never footnotes.
Do we’d like shareholder approval to reprice underwater choices?
Whether or not repricing underwater choices wants shareholder approval is dependent upon your fairness plan’s phrases, not on a single common rule. Many plans require it, and investor rights, voting, and credit score agreements can add their very own. Give holders an election as an alternative of a uniform strike reduce and the supply turns into a young supply beneath Rule 14e-1, which has to remain open 20 enterprise days. Board motion and documented plan authority come first both means, and at indinero that evaluation sits in the identical file because the refreshed 409A.
Will repricing create new inventory comp expense beneath ASC 718?
Sure, repricing is a modification beneath ASC 718, and any incremental truthful worth on the modification date turns into extra compensation price. Incremental worth is the surplus of the modified award’s truthful worth over the unique award’s truthful worth instantly earlier than the change, measured with two option-pricing runs. The vested portion hits instantly, the remainder spreads over the remaining vesting interval, and authentic grant-date expense retains operating both means. Indinero computes the modification cost off the identical refreshed 409A truthful market worth the board decision relied on.
