Financial Reporting
The Cheap Stock Guide Is Being Rewritten: What the AICPA's First Full Update Since 2013 Means for Your 409A
The AICPA's cheap stock guide is getting its first full rewrite since 2013. What the draft changes about secondaries, ASC 718, and your 409A strike price.
By 409.AI Team - 2026-08-21
# The Cheap Stock Guide Is Being Rewritten: What the AICPA's First Full Update Since 2013 Means for Your 409A
Your last 409A put common stock at $6.20. Four months later you ran a tender offer, and a growth fund bought $14 million of employee shares at $13.50 apiece. Now your auditor wants to know which number represents fair value, whether the $7.30 spread was compensation, and why your valuation report barely mentions the tender at all.
The document your valuation firm reaches for to answer that question is being rewritten. The AICPA's Financial Reporting Executive Committee (FinREC) released a working draft of the updated Accounting and Valuation Guide, *Valuation of Privately-Held-Company Equity Securities Issued as Compensation*, in late December 2025. The comment window closed on June 1, 2026, and the [final version is expected in late 2026 or early 2027](https://viewpoint.pwc.com/us/en/pwc/in-briefs/2026/ib202601.html). It will be the first complete revision since 2013.
Most founders have never heard of this guide. Every one of them is affected by it.
The rulebook behind your valuation report
Practitioners call it the cheap stock guide. It is not authoritative GAAP, and the IRS never adopted it. What it is, in practice, is the reference that valuation specialists and audit teams work from when a private company has to put a number on its common stock.
If you have read a 409A report and encountered a backsolve, an option pricing model allocation, a probability-weighted expected return method, or a discount for lack of marketability, that vocabulary and the reasoning behind it trace back to this guide. We've written separately about [how OPM and PWERM turn an enterprise value into a common share price](https://www.409.ai/articles/409a-allocation-methods-opm-pwerm-backsolve) and about [the marketability discount that finishes the job](https://www.409.ai/articles/discount-lack-marketability-dlom-409a-valuation). The guide is where the conventions behind both were codified.
The AICPA published the working draft [for public comment on its advocacy site](https://www.aicpa-cima.com/advocacy/download/working-draft-of-the-updated-valuation-of-privately-held-company-equity-unpublished), following a partial release: [working drafts of chapters 8 and 9 came out in July 2024](https://kpmg.com/us/en/frv/reference-library/2026/aicpa-issues-working-draft-updated-cheap-stock-guide.html), ahead of the full draft.
Thirteen years is a long time in private markets
Think about what a cap table looked like in 2013. The SAFE was brand new. Series A terms were comparatively plain. The road to an IPO was shorter, and employees who wanted liquidity before it mostly waited.
None of that describes the market a 2026 valuation has to measure. Structured preferred with participation rights and ratchets shows up in later rounds. SAFEs stack three and four deep before a priced round ever happens, [each one shaping the strike price your team gets](https://www.409.ai/articles/how-safes-affect-your-409a-valuation). Companies stay private into their second decade, so [the liquidation preference stack that sits above common stock](https://www.409.ai/articles/liquidation-preferences-waterfall-common-stock-exit) has more time to grow and more layers to it. Employee tender offers and broker-run secondary trades are routine rather than exceptional.
The 2013 guide was not written against that backdrop. The update is largely an attempt to catch up, and it lands in three places that matter to founders.
Change one: secondary transactions stop being a footnote
Chapter 8 is the heart of it. The draft pushes valuation specialists to calibrate their conclusions to what can actually be observed: primary financing rounds, secondary market trades, and company repurchases. It asks them to identify the principal market for the security and then weigh how relevant each observed transaction really is.
Relevance is where the judgment sits. The draft directs practitioners toward higher-volume transactions over one-off trades, tells them to give little or no weight to a transaction that was not orderly, and reminds them that a trade in preferred stock is not evidence about common stock when the two carry different liquidation preferences and anti-dilution terms. Transactions before or after the measurement date may need adjusting for what changed in between.
Run that against the opening example. Your Series C priced preferred at $19.00. Your 409A put common at $6.20, reflecting the preference stack and a marketability discount. Then 42 employees sold roughly 1.04 million shares to a single institutional buyer at $13.50.
Under the old habits, a valuation firm could note the tender and move on. Under the draft guide, that transaction is a data point that has to be confronted. Was it orderly, or were sellers under pressure? Did the buyer have access to the same information a market participant would expect? Was that volume meaningful against your common shares outstanding? If the answers point toward a real, orderly, informed transaction in the same security, a $6.20 conclusion needs to explain itself. Our earlier piece on [what tender offers and secondary sales do to a 409A](https://www.409.ai/articles/tender-offers-secondary-sales-409a-valuation) walks through the mechanics; the draft guide raises the documentation bar on all of it.
Change two: the compensation question gets sharper
Chapter 9 asks something founders rarely think about during a tender: was part of that price compensation?
Under ASC 718, when a company repurchases shares from employees above fair value, the excess is recognized as compensation cost rather than treated purely as a capital transaction. The scope reaches further than the company itself. ASC 718-10-15-4 provides that a share-based payment from a related party or another holder of an economic interest in the entity to a grantee is accounted for under ASC 718 unless it is clearly for a purpose other than compensation for goods or services. In plain terms, an investor buying employee shares directly can still create an accounting charge on your income statement.
The arithmetic is not gentle. Say a refreshed valuation at the transaction date supports $8.00, up from the $6.20 four months earlier, the tender cleared at $13.50, and 1.04 million shares changed hands. The $5.50 spread across those shares is roughly $5.7 million. If the facts point to a compensatory element, that amount runs through compensation expense, with the buyer's payment treated as a capital contribution to the company. No cash moves through your accounts, and your operating results still get $5.7 million worse.
The draft asks for a holistic assessment rather than a bright-line test: what benefit did the buyer receive, what role did the company play in facilitating the sale, and does the pricing make sense on its own investment terms? That judgment belongs in your files before the auditor asks, not after. If your team is still building the underlying expense model, our [ASC 718 primer for startups](https://www.409.ai/articles/asc-718-stock-based-compensation-startup-guide) covers the base mechanics that this sits on top of.
Change three: complex capital structures get more scrutiny
Chapter 6 tightens the allocation step, refining how value gets split between preferred and common. The draft puts more weight on testing implied credit spreads and examining the components of a preferred liquidation preference. It also asks specialists to confirm that the allocation method reflects market participant assumptions, and to stress-test how sensitive an option pricing model really is to its inputs.
That last item deserves attention, because OPM sensitivity is where a lot of private valuations quietly live. Take a company with a $340 million equity value and a $190 million preference stack. Run the OPM with 55% volatility and a three-year expected time to liquidity, and common might come out near $4.10 per share. Move volatility to 70% and stretch the horizon to five years, and the same model can push common past $6.00, because a longer, more volatile path gives common more optionality. Neither input is wrong on its face. The draft guide wants the choice defended rather than assumed.
What to do before the final guide lands
First, start keeping a transaction register. For every secondary trade, tender, and repurchase, record the date, the security and its rights, the number of shares, the price, who bought, how the buyer was introduced, what information they received, and what role the company played. Most companies reconstruct this two years later under audit pressure, badly.
Second, price your next tender with the accounting consequence in view. A tender that clears meaningfully above supportable fair value is not free, and the cost surfaces in your financial statements rather than at the negotiating table.
Third, ask your valuation provider directly how they are treating the draft. Reports dated after finalization will be tested against the new text, and a firm that has already adjusted its calibration and documentation practices will save you a painful audit cycle.
Where accounting ends and tax begins
Keep the two regimes separate in your head. The cheap stock guide is financial reporting guidance. Section 409A is tax law, and its safe harbor comes from Treasury regulations, specifically the presumption of reasonableness attached to an independent appraisal under [Treas. Reg. 1.409A-1(b)(5)(iv)(B)](https://www.ecfr.gov/current/title-26/section-1.409A-1). Nothing FinREC publishes changes what the IRS requires. We laid out that distinction in [what actually earns 409A safe harbor](https://www.409.ai/articles/409a-safe-harbor-price-vs-qualified-appraiser).
The practical reality is messier, because one appraisal usually serves both purposes, and the evidence is shared. A documented, orderly secondary at $13.50 is awkward to reconcile with a $6.20 strike price whether the question comes from an auditor or an examiner. Companies heading toward an IPO feel this first, since [SEC staff already probe pre-IPO cheap stock](https://www.409.ai/articles/cheap-stock-pre-ipo-409a-sec-option-grants) along much the same lines.
The takeaway is narrower than "get a better 409A." It's this: the transactions in your own stock that you have been treating as HR events are becoming primary valuation evidence, and the record you keep of them in 2026 is the record your 2027 audit will be built on. Write it down while you still remember who bought what, and why.
*409.ai delivers expert-reviewed [409A valuations](https://www.409.ai/products/409a) and [ASC 718 reports](https://www.409.ai/products/asc-718) built to hold up under audit. This article is general information, not accounting or tax advice; talk to your auditor and tax adviser about your specific facts.*