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Startups get a shake-up over stock options: IRS regulation adds a new layer to valuation.

Article Excerpt
An Internal Revenue Service regulation covering how companies should value stock options is causing some privately held startups to hire experts to ensure that those values are accurate and don't trigger further tax liability.

While the new rule won't take effect until January 2007, the proposed regulations issued by the IRS last year sent shock waves through the world of smaller entrepreneurial companies, many of which have long used stock options as an integral part of compensation and as incentives to attract and retain top talent.

"This is just another regulatory burden for many smaller companies," said Tom Siegel, managing director for Shepherd Ventures, a San Diego-based venture capital firm. "In concept (the new rules) are all very good, but the practical implications of this concept upon early-stage companies is quite difficult."

Siegel said several firms his venture fund has invested in have...

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