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Cheap stock refers to the issuance of an equity security (e.g. options, warrants, common stock or restricted stock), during the 12 months preceding an IPO for a price (or with a strike price) that is below the expected IPO price. Typically this issue arises in connection with the granting of employee stock options. To avoid a cheap stock charge, it is important to support each option grant by obtaining a contemporaneous valuation from an independent valuation specialist.
We provide valuations of cheap stock in accordance with the allocation methods outlined in the AICPA Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation.”
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