Stock Option Question

[manlymatt83]

If a private company says in their offer letter that they are going to offer "X" amount of stock in an option, is there any way to tell the value of those shares? I mean, if the total amount of shares in the company is X*100000, then those aren't worth much, am I correct? Is there a way to tell?

 

[hjo3]

EDIT: Option.

 

[leftyman]

I thought your title said.... Steak Option Question

 

[MustISO]

If they're a private company there is no real value. There's no value until the stock is actually put out on the market and your options are vested and you exercise them. Do they have a vesting program?

 

[manlymatt83]

Originally posted by: MustISO
If they're a private company there is no real value. There's no value until the stock is actually put out on the market and your options are vested and you exercise them. Do they have a vesting program?

No. But the thing is.... there HAS to be some way of finding out how many shares this is.

For instance. If I have 1 share, and there are 100 shares total, I have 1%

If there are 1000000 shares, and I have 100, then that's not much.

Soooo... the question on hand is: how many shares is this?

-Matt

 

[vi edit]

The only things you need to know is the perceived strike price (value) and the number that are being offered.

 

[SSSnail]

Generally, if you have options with a company that's not yet public and they seem to have a future, it's a good thing. Unless you can guess what the company perceive caps would be, and how many shares are currently held, there's no way to find out how much your options are really worth.

Some questions you may want to ask yourself regarding the values of your options. What kind of business is this company in? How long have they been around? How they are perceived in the industry? Who are their competitors? How long do you think you'd work for them? How long do you think they'd want to keep you? Most of the time, if they're offering options, they want to keep you for a while.

 

[GasX]

valuating a private company is tough as you don't generally have access to financial stements and there is no liquid market for the stock.

Do you have the ability to estimate get ANY of the following info?

# of outstanding shares
current revenue
current profit
prediction of revenue at some time in the near future (like after that hot new product hits the market...)
long term growth estimate

even if they are ballpark estimates, you can make an estimation of the value of the options. Temper this against the likelihood of the company going public.

 

[JulesMaximus]

Originally posted by: leftyman
I thought your title said.... Steak Option Question

See, I thought it said Spock Option Question...

 

[bsobel]

No. But the thing is.... there HAS to be some way of finding out how many shares this is.

Ok, you have an offer letter from a private company and they are offering you stock options. Your trying to determine what (if any) future value those options could have.

If the company has taken VC investment (not angel) it's likely that some of the financials are available (vcwire and other services). But as a 'end user' as it where, you wouldn't get access anyhow.

In your case, the obvious answer is to ask. The answer isn't a secret and if they won't tell you, that should set off some warning lights.

Bill

p.s. If this is sw related and they are a known entity (not a complete startup) PM the name, I'll let you know if I've looked at them and if I can what I can tell you about them depending on if the info is under a NDA or not.

 

[JS80]

Originally posted by: MustISO
If they're a private company there is no real value. There's no value until the stock is actually put out on the market and your options are vested and you exercise them. Do they have a vesting program?

u r wrong. i audited a company where all the employees had stock options issued in the pennies. they were sold for $70/sh. everyone including the secretary became millionaires. this was a small private company with ~30 employees.

 

[bsobel]

Originally posted by: JS80

Originally posted by: MustISO
If they're a private company there is no real value. There's no value until the stock is actually put out on the market and your options are vested and you exercise them. Do they have a vesting program?

u r wrong. i audited a company where all the employees had stock options issued in the pennies. they were sold for $70/sh. everyone including the secretary became millionaires. this was a small private company with ~30 employees.

No he's not wrong. At the time those people joined it was impossible to value those stock options. They later had a liquidity event (the purchase) which gave them value. You are valuing the event after the liquidity event (which is rare for startups) instead of prior (which is where the OP is).

The posters question is about a company he is considering joining, at current those stock options have potential value but no actual value. The amount of potential value will be determined by how well the company does or the value its IP generates.

Bill

 

[Miramonti]

Originally posted by: bsobel

Originally posted by: JS80

Originally posted by: MustISO
If they're a private company there is no real value. There's no value until the stock is actually put out on the market and your options are vested and you exercise them. Do they have a vesting program?

u r wrong. i audited a company where all the employees had stock options issued in the pennies. they were sold for $70/sh. everyone including the secretary became millionaires. this was a small private company with ~30 employees.

No he's not wrong. At the time those people joined it was impossible to value those stock options. They later had a liquidity event (the purchase) which gave them value. You are valuing the event after the liquidity event (which is rare for startups) instead of prior (which is where the OP is).

The posters question is about a company he is considering joining, at current those stock options have potential value but no actual value. The amount of potential value will be determined by how well the company does or the value its IP generates.

Bill

Stock Options in Private Companies

 

[JS80]

Originally posted by: bsobel

Originally posted by: JS80

Originally posted by: MustISO
If they're a private company there is no real value. There's no value until the stock is actually put out on the market and your options are vested and you exercise them. Do they have a vesting program?

u r wrong. i audited a company where all the employees had stock options issued in the pennies. they were sold for $70/sh. everyone including the secretary became millionaires. this was a small private company with ~30 employees.

No he's not wrong. At the time those people joined it was impossible to value those stock options. They later had a liquidity event (the purchase) which gave them value. You are valuing the event after the liquidity event (which is rare for startups) instead of prior (which is where the OP is).

The posters question is about a company he is considering joining, at current those stock options have potential value but no actual value. The amount of potential value will be determined by how well the company does or the value its IP generates.

Bill

Many stock option plans from private companies have buyback values on them so to make a blanket statement "if they're a private company there is no real value" is plain wrong. It depends on the company and the option plan.

 

[Fern]

Originally posted by: mjuszczak
If a private company says in their offer letter that they are going to offer "X" amount of stock in an option, is there any way to tell the value of those shares? I mean, if the total amount of shares in the company is X*100000, then those aren't worth much, am I correct? Is there a way to tell?

I'm a CPA, but your post isn't entirely clear to me.

Is this "offer letter" and employment offer?

Stock option grants are a taxable event. If it's a non-qualified stock option plan you will taxed upon the value of the options immediately. They will have to place some value upon the option. So you will know what its value is, at least their opinion.

If it's a qualified stock option plan, such as an ISO (incentive stock option plan) different rules will apply, and taxation will be deferred if you follow the rules. However, there is still paperwork associated with this that will tell a value.

Typically, stock options allow you to purchase the stock at some predetermine price. Is their a price associated with this option?

Private, or more accurately closley held companies do have a stock value contrary to other assertions here. However, if it is a closely held company it is not traded on any exchange - is that the case?

If there is no exchange for the sale of it's stock and you own a minority interest your stock will likely be deeply discounted (and hard if not impossible to sell).

The best thing that can happen then is that someone else buys out the entire company and you get your fair share.

This is terribly complicated, if you would like additional information feel free to PM me.

Fern

 

[manlymatt83]

Thanks all for your help!

 

[JS80]

Originally posted by: Fern

Originally posted by: mjuszczak
If a private company says in their offer letter that they are going to offer "X" amount of stock in an option, is there any way to tell the value of those shares? I mean, if the total amount of shares in the company is X*100000, then those aren't worth much, am I correct? Is there a way to tell?

I'm a CPA, but your post isn't entirely clear to me.

Is this "offer letter" and employment offer?

Stock option grants are a taxable event. If it's a non-qualified stock option plan you will taxed upon the value of the options immediately. They will have to place some value upon the option. So you will know what its value is, at least their opinion.

If it's a qualified stock option plan, such as an ISO (incentive stock option plan) different rules will apply, and taxation will be deferred if you follow the rules. However, there is still paperwork associated with this that will tell a value.

Typically, stock options allow you to purchase the stock at some predetermine price. Is their a price associated with this option?

Private, or more accurately closley held companies do have a stock value contrary to other assertions here. However, if it is a closely held company it is not traded on any exchange - is that the case?

If there is no exchange for the sale of it's stock and you own a minority interest your stock will likely be deeply discounted (and hard if not impossible to sell).

The best thing that can happen then is that someone else buys out the entire company and you get your fair share.

This is terribly complicated, if you would like additional information feel free to PM me.

Fern

I bet you they are ISOs.

 

[iversonyin]

Stock option dilute company's ownership. If the company has 100 shares outstanding, and they give you stock option of 10 shares. That 10 shares should be NEW shares added to the existing 100 shares. So you not exactly getting 10%.

Its hard to valuate without ANY information. The easiest way is to look for a comparable publicly traded company and use the P/E to apply to your own company.

Ei: Publicly traded media company has a P/E of 10. The company you work for(assume is a media company) earned $100,000 last year. The company estimated value is $1,000,000 if its go public. The company has 100,000 shares outstanding (same type of ownership). Each share would then worth $10.

 

[bsobel]

If it's a non-qualified stock option plan you will taxed upon the value of the options immediately. They will have to place some value upon the option. So you will know what its value is, at least their opinion.

This is only true if their is a value spread between the options price and the actual 'price'. This is rarely done and the net result is the NQs do NOT result in a taxable event when given. When sold they are treated as normal income so SS and Medicare apply, unlike with ISO sold according to plan.

Bill

 

[Fern]

Originally posted by: bsobel

If it's a non-qualified stock option plan you will taxed upon the value of the options immediately. They will have to place some value upon the option. So you will know what its value is, at least their opinion.

This is only true if their is a value spread between the options price and the actual 'price'. This is rarely done and the net result is the NQs do NOT result in a taxable event when given. When sold they are treated as normal income so SS and Medicare apply, unlike with ISO sold according to plan.

Bill

Umm... Yes, you've just agreed with me. If the stock sells for $10, and the option allows to purchase for $10, it has no value for tax purposes.


As regards:

This is only true if their is a value spread between the options price and the actual 'price'. This is rarely done and the net result is the NQs do NOT result in a taxable event when given.

Yeah, but: I typically only deal with stock option plans from Fortune 500 company's, and they have a vesting period (typically 3 yrs) and are "subject to a substantial risk of forfiture". These options are primarily to motivate and retain valued employees, thus the 3 yr period.

Absent such a vesting period the only possible logical purpose (I can think of ATM) is to compensate. If emplyees are granted the options immediately upon employment, absent a vesting period, they could quit the "next day" and still keep those options. That would be a very unwise, problematic and costly occurence in the event the company is later sold. A potential windfall for the "one-day" worker.

So, I always see a vesting period (although nothing in tax law requires one). Typically at the end of the 3 yrs the stock price will have risen and the receipt of the option (after the expiration of the vesting period) will result in taxation. Usually the exec will sell the stock immediately upon excercise (so called "excer-sale").

Now, I have seen smaller companies (my real concern when reading his post), typically "start-ups" issuing (selling) stock under (Regulation D) 504, 505, or 506 offering memorandums who create stock option plans, or even stock grant plans to compensate execs & offciers because they lack the cash to do so. These plans are created/devised by management which almost always lacks understanding of the tax rules, and (big) tax problems are created.

I highly suspect that the OP's company falls into this latter category (it can't be publicly traded or he/she wouldn't be posing this valuation questions). My 1st post was intended to subtely, yet suffiicently alarm him to the complexities and potential tax problems of such stock option plans. So, be wary of taxation and know that this stuff can be complicated.


Fern