Earlier quoted context omitted.
Existing 409A valuations already take all of that into account. When an employee is issued options, the one thing he can be reasonably sure of is that they are not in the money. Options have to be issued at or above the FMV for common stock, or it is taxable compensation to the employee. Note the "at or above" language. An employee's option has to be out of the money the day it is issued, but that could be by .01 or…
Correct me if I'm wrong but the relevant 409A valuation is the most recent one done when you exercise your options and taxes on them become due. I think that's the situation GP was referring to, that this approach might help fix. Unless you're saying that when Square's valuation suggested a share price of ~$15, a 409A done at the same time would have returned a value closer to the ~$5 that the paper suggests is more…
Anybody who exercised immediately at $9.11 probably wasn't subject to any tax liability (assuming appropriate 83b election). Employees exercising at that price may have fooled themselves into thinking they were already $6/share in profit-land, which would be incorrect and is the point of the article.
But the bigger problem to me is that employees were fooled into paying $9.11 for something that was actually worth far less.