FAS 123R requires that equity compensation for employees, in virtually any form, be recognized on the face of the financial statements in order to comply with Generally Accepted Accounting Principles.
One of the implications of this is that options need to be expensed over the vesting period of the option. This, in turn, requires that the options be valued. Valuing options is relatively easy once you know the underlying stock price.
In a private company, there is no ready market indicator of the market value of the stock, effectively requiring a third-party valuation from a firm like Thorpe Capital Group. To be clear, there are countless firms that do good valuation work.
For private companies, this crazy, burdensome exercise matters because you can't complete an audit without completing this crazy, burdensome exercise. If you don't have audited financial statements, you modestly increase operational risk and significantly increase deal risks if you are seeking capital or an exit.
On the other hand, if you don't anticipate selling the business any time soon, don't need to raise capital and don't have a bank or other investor requiring an audit, you may not need to go through all of the effort. Just remember, if you ever decide to have an audit done, all of that option compensation will have to be calculated in the mix.
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