Brad,

Great points you raise here, and I agree this is a real pain for early stage companies. As you know, I am part of a boutique valuation services firm that serves venture backed clients on both coasts. We've seen a fair slice of the market and been through our share of SAS 73 reviews. With that in mind, I'd make two points to complement your post.

1) CFOs of private companies (big and small) should cause their valuation providers to speak with their auditors prior to engagement. Not prior to starting the work, mind you, but prior to even hiring the valuation shop -- prior to signing the engagement letter. The fact is that valuation providers will be held to the Fair Value standard, and it's a bony one. If your auditors and valuation providers do not see eye-to-eye on certain practices -- the most obvious being which allocation methodology will be used (i.e., the Option Pricing Method), then you should go find another provider.

2) We have heard from a very knowledgeable source within the IRS, in a face-to-face conversation, that the IRS does not (yet) have an answer to the question of how to reconcile Fair Market Value (409A) with Fair Value (123R). This person went on to say that they are "leveraging the financial reporting community" particularly with reference to allocation methodologies (again, the Option Pricing Method). It is only a guess on my part (speaking personally here, and throughout this comment), but that sounds a lot to me like convergence.

Good news, bad news for our clients. The good news is that so-called “dual purpose” reports will withstand the scrutiny of both tax and GAAP enforcers. The bad news is that the valuation exercise for all companies -- big and small -- became irreversibly more challenging in 2007 due to the advent of Fair Value accounting via SFAS 157.

At risk of appearing self-promoting, I would point your readers to the following brief articles that attempt to further explain the issues from our perspective:

“Dual Purpose is de rigueur” http://www.arcstonepartners.com/valuationArticles...

“This just about sums it up”

http://www.arcstonepartners.com/valuationArticles...

“Valuation Updates: when and how”

http://www.arcstonepartners.com/valuationArticles...