Can you elaborate on the exact financial implications of a reverse split prior to IPO? This Brad Feld article [1] seems to say the aversion to this is simply emotional.
[1] http://www.feld.com/archives/2005/06/when-are-350-million-sh...
[1] http://www.feld.com/archives/2005/06/when-are-350-million-sh...
I'm not an accountant, but I've listened to a lot of accountants explain what is, and what is not, taxable. In this case, if you let your employees take a haircut (so their $1/share strike price is now $50 a share on a company expected to go out at $18) that isn't taxable (and it bites to be an employee). If your employee exercised their shares at the lower cost (to avoid capital gains etc) they now have a 'basis' value of $50 a share so if they sell shares at $18 the can claim a $32 / share capital loss. If you take back the vested but unexercised shares and issue vested shares at a new lower price, that price can be no lower than the pending IPO price (FMV) or it's a taxable event. And then when your company makes it out the gate and your long suffering investors cash out their funds, it pushes the price down around $8 once again putting your employees in a position to exercise at a loss or leave them on the table.
The key though is the company went through a period higher valuation, and employees are issued shares at the higher valuation and at IPO time the company is worth less than it was when you got your option, so your strike price is "high" relative to the company value.
really, there are no financial implications. the valuation of the company stays the same with a split, but the price of the stock changes proportionate to the quantity outstanding. valuation = # shares * $ per share
what the reverse split does (or split - as twilio did a 2:1 split just over a year ago) is put the cost per share in a range that appears more attractive to buyers. in today's market, that is ~$15 +/-5. so if the internal valuation pre-IPO has the stock at $8, the company often reverse splits 1:2 and then you have an initial price back at $16. that way you don't look like a penny stock going out the door.