Employees get refresher grants annually with an ever increasing strike price from .10 - 3.50 over say 8 years. Now during the road show the bankers say "You're company is really worth about 1/10th what you think its worth according to this feedback, we either cut off the roadshow or we recaptialize at a lower valuation." So the company does a 50:1 reverse stock split to get its outstanding stock numbers in line with the expected valuation of the company.
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.