4 ms·

How would you determine market price for stock options in a startup that's not public yet?

by itbeho 13y ago

loumf 13y ago
It would not be prudent to exercise options that are not liquid. There is no benefit to doing that. You don't, for example, usually get meaningful voting rights with those shares.
- kalkin 13y ago
  Well, it is not uncommon for options to expire after you leave a company if they are not exercised. So if you take a new job and don't want to throw away your options...
- sokoloff 13y ago
  You might want to exercise options before a new priced round (series B, C, D, etc) or before an S-1 filing. Yes, this exposes you to some adverse treatment (AMT for ISOs, and the risk of paying income tax on shares that later crash or become worthless), but it also establishes an ownership date (for the LTCG holding period) and a basis (which will presumably be higher in the next priced round or IPO, even though they're illiquid now. (And as kalkin observes, if you're leaving the company with in-the-money options.)
ChuckMcM 13y ago
Periodically, the board of directors will go through a process for determining the value (aka the market price) for stock options. If you exercise your option and the exercise price is less than the current valuation price, then you will experience a 'taxable event.' I would guess that you'd be hit with the AMT in the US if computing the tax based on that exercise value was higher than your non-AMT computed tax. But you would want to check with your accountant. Some companies allow you to file an 83b election, which is to exercise all your stock immediately, and as it is worth exactly what you are paying for it, no taxable event, and then take ownership of it as it vests. A person might choose to do that because in the event of going public or any time when the common stock becomes liquid, you would only pay long term capital gains rather than short term gains. The downside is that if the company exits where the common stock is worthless (not an uncommon occurrence for startups) then you would lose that money you paid originally. (but you could write off that loss, $3,000 a year, against future income :-)

How would you determine market price for stock options in a startup that's not public yet?

by itbeho 13y ago

How would you determine market price for stock options in a startup that's not public yet?

loumf 13y ago

It would not be prudent to exercise options that are not liquid. There is no benefit to doing that. You don't, for example, usually get meaningful voting rights with those shares.

kalkin 13y ago
Well, it is not uncommon for options to expire after you leave a company if they are not exercised. So if you take a new job and don't want to throw away your options...
sokoloff 13y ago
You might want to exercise options before a new priced round (series B, C, D, etc) or before an S-1 filing. Yes, this exposes you to some adverse treatment (AMT for ISOs, and the risk of paying income tax on shares that later crash or become worthless), but it also establishes an ownership date (for the LTCG holding period) and a basis (which will presumably be higher in the next priced round or IPO, even though they're illiquid now. (And as kalkin observes, if you're leaving the company with in-the-money options.)

ChuckMcM 13y ago

Periodically, the board of directors will go through a process for determining the value (aka the market price) for stock options. If you exercise your option and the exercise price is less than the current valuation price, then you will experience a 'taxable event.' I would guess that you'd be hit with the AMT in the US if computing the tax based on that exercise value was higher than your non-AMT computed tax. But you would want to check with your accountant. Some companies allow you to file an 83b election, which is to exercise all your stock immediately, and as it is worth exactly what you are paying for it, no taxable event, and then take ownership of it as it vests. A person might choose to do that because in the event of going public or any time when the common stock becomes liquid, you would only pay long term capital gains rather than short term gains. The downside is that if the company exits where the common stock is worthless (not an uncommon occurrence for startups) then you would lose that money you paid originally. (but you could write off that loss, $3,000 a year, against future income :-)