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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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409A – Tying Up Loose Ends

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This is our last post on 409A until the IRS issues more guidance or accepts some of the comments it has received during the comment period. In other words, we are “done” with 409A until sometime between tomorrow and next year. While I was hoping to get to 10 posts so I could refer to this series as “My Top 10 Thoughts On 409A” to join in with the top 10 list of 2005 meme, we only made it to 9.  We hope you’ve enjoyed this series (yes – that was sarcastic.)

To wrap things up, we have a couple of questions that we are asking ourselves these days in light of 409A.

How the hell will the IRS audit this? We have no clue how this will actually play out in the real world. Is the IRS hiring a bunch of private company valuation experts? If so, they are going to have to “pay up” as there aren’t enough of these types in the private sector, much less the public sector.  Or maybe these will become new members of the Homeland Security Accounting Compliance Task Force (a newly formed task force that is overseen by the Office of Civil Rights and Civil Liberties.)

What will happen to the valuation reports? Given that valuation reports of private companies will contain a ton of confidential data, what will happen if an employee gets audited and requests the report to fight off the IRS? Does the company have a duty to give the report to the employee? Will the company have to expend resources and work directly with the IRS on a confidential basis? Will these reports “find” themselves out in the public? What about attorney client privilege issues? Mmm – yummy rat hole.

Will the IRS actually respond to any of the comments given to it? Jason has been active with the NVCA and the general counsel / COO group to provide comments and in addition many law firms and accounting firms are drafting their comments as well, but will this all fall on deaf ears? The idea of the internal valuation method being essentially “useless” could drastically change with the right tweaks to the regulation. We got an encouraging early Christmas present from the IRS and are hopeful for an early Easter present also.

Bottom line, have “fun” with 409A in 2006. There is a lot of noise in this area and hopefully we helped quiet some of it (or – at least made the noise more entertaining.)  We’ll post periodically with updates as the proposed rules evolve.

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