Tax Center / Global Tax Guide / Glossary / Discussion / Newsletters / About Us
Register Log in
myRecordsmyToolsmyClients
   Pre-IPO   
Basics   
Early-Exercise Options   
Going Public   

Annotated diagram of Schedule DTax errors can be costly! Don't draw unwanted attention from the IRS. Our Tax Center explains and illustrates the tax rules for sales of company stock, W-2s, withholding, estimated taxes, AMT, and more.


Pre-IPO: Basics


Test Your Knowledge Test your knowledge with our NEW! Pre-IPO quiz.


  Articles   FAQs  

Drafting An Equity Incentive Plan For A Private Company: Issues Your Company Considers This is premium content

Tristan Brown, Jennifer M. Wolff, and PLC Employee Benefits & Executive Compensation
NEW! Equity compensation is often a significant component of the total compensation paid to employees and other service providers. While some provisions of private company equity plans mirror the provisions in public company plans, in the private company context, equity compensation raises special concerns.

Understanding The Risks In Your Pre-IPO Stock Options (Part 1) This is premium content

Edwin L. Miller, Jr.
Understand what could happen to your stock options or restricted stock in venture capital financings, in an acquisition, or in an IPO. Part 1 looks at M&A deals; Part 2 analyzes IPOs.

Negotiating And Structuring Your Stock Compensation (Part 2): Privately Held Companies This is premium content

Alisa J. Baker
Part 1 looked at the problems of conflicting or inconsistent provisions among different documents. Part 2 discusses which existing documents and rules nonfounder executives must consider when negotiating for equity compensation during the early (pre-public) stages of a company's development and growth.

Your Company Is Going Public: How Your Stock Compensation May Change This is premium content

Ryan Harvey and Bryan Smith
Podcast included! As privately held companies prepare for their market debuts, they make changes in their equity compensation programs. This article looks at some of the shifts you can expect in your stock grants both during the period leading up to your IPO and after your company goes public.

Stock Grant Sizes In Pre-IPO Tech Companies

Johanna Schlegel
Particularly in high-tech startup companies, it is more important to know what percentage of the company a stock option grant represents than how many shares you get.

Google Options Make Masseuse A Multimillionaire

Katie Hafner
The New York Times
A happy tale about the difference that stock options can make in the lives of ordinary workers, especially at pre-IPO companies which become successful and then go public.

Return to top of this page

What are restricted securities? Do they differ from restricted stock?

Don't confuse restricted securities and restricted stock. They are very different...

Why doesn't my employer offer me equity compensation?

If your employer is a for-profit corporation, it probably can offer stock options, restricted stock, or other types of equity compensation to its employees. There may, however, be many reasons why your employer is not offering stock grants...

UPDATES! How do privately held companies create liquidity for employees' options and stock, other than going public or getting acquired? This is premium content

Stock in privately held companies lacks liquidity, is not registered with the SEC, and usually has company-imposed contractual resale limits, so resales are difficult and need to follow the requirements of SEC Rule 144. Some private companies allow resales of stock by...

How do I value options and stock in a privately held company? This is premium content

Different methods can be used. The valuation of options and stock issued by private companies is more art than science. At least in the context of valuations for estate and gift tax purposes, the IRS has admitted...

UPDATES! Any survey data on stock grants in privately held companies? This is premium content

While it is hard to find data, we have located a few sources. The data and examples from the surveys summarized here show that...

How does a private company decide on the size of a stock grant? Any data on grant sizes? This is premium content

Unlike public companies or large private companies that may have grant guidelines, most private companies determine the grant size by a combination of factors. Surveys show that...

UPDATES! How do pre-IPO and other private companies determine exercise prices? This is premium content

At pre-IPO and other private companies, boards of directors usually determine exercise prices for stock options. They base them on the stock's fair market value. Methods for valuation include...

NEW! Why would a privately held company grant RSUs and not stock options? This is premium content

There may be several reasons. With restricted stock units (RSUs), the company grants fewer shares, as RSUs are always...

Can a private company contractually restrict my ability to resell my shares, or do the securities laws limit my ability to resell them? This is premium content

It is not easy to sell stock in privately held companies. Most make shareholders obey...

In a privately held company, can restricted stock and stock option grants be structured so that they vest only when the company goes public or gets acquired? How is this taxed? This is premium content

Companies have flexibility in setting the conditions on which their stock grants can vest. This allows your company to base the vesting of your grant on...

Is the tax treatment different if I work for a pre-IPO company? For example, are taxes delayed at exercise until the stock is registered with the SEC? This is premium content

The tax treatment for private, pre-IPO, and large publicly traded companies is...

Is the date for determining taxes delayed if the stock I receive is not registered with the SEC and I cannot immediately sell it? This is premium content

As the IRS confirmed in Revenue Ruling 2005-48, the tax-measurement date...

Are stock option and restricted stock grants negotiable? What terms are negotiable at hire? This is premium content

In most instances, stock grants are subject to the same types of practical limitations as negotiations for your cash compensation. For example, an employer may...

How much will my options be worth in the future? This is premium content

The future value and its certainty depend on whether you are at a public or a private company. You determine the practical cash value of options in public companies by noting the...

UPDATES! Can consultants or independent contractors be granted stock options or company stock? How common is this practice?

Private companies sometimes partly use stock options (NQSOs, not ISOs) or stock grants, along with or instead of cash, to compensate consultants and independent contractors (separate from grants that public and private companies make to nonemployee directors). The terms of these grants can be...

UPDATES! A private equity firm is buying my company. What will happen to my stock options and restricted stock? This is premium content

The vesting of the grant will probably accelerate according to specifics in your stock plan or grant agreement. The grants will probably be cashed out. Depending on your level in the company and the length of your employment, you may receive a meaningful grant in your newly private company that will require you to...

What is a buyback? Is my employer required to buy back my shares when I leave the company? This is premium content

Private companies often include in the grant agreement the right to buy back the vested shares. The repurchase right can be based on...

I have founder's stock that has become subject to forfeiture and transfer restrictions required by new investors. Does my stock become taxable to me, or do I need to make a Section 83(b) election? This is premium content

The imposition of forfeiture, transfer, and buyback restrictions on you when a new investor acquires stock...

My employer is an S-corporation. Can I still be granted stock options? This is premium content

Yes, though for two reasons S-corporations generally do not issue stock options. First...

Our company is a partnership. Are stock options available? This is premium content

Yes, but complex issues must be resolved. These matters include the proper treatment under accounting rules for noncorporate entities (FASB's APB No. 25) and tax-basis issues...

Can limited liability companies use stock options or make other stock grants? This is premium content

Limited liability companies (LLCs), which are somewhat similar to S corporations, have membership interests and not stock. Therefore, LLCs cannot offer stock options, restricted stock, direct rights to shares, or an employee stock purchase plan. However, they can give...

What is a "phantom stock plan"? This is premium content

Phantom stock is similar to stock appreciation rights (SARs) in that you receive a sum based on the appreciated value of the company's shares. But instead of shares of stock, phantom stock awards are in the form of...

How is fair market value (FMV) determined for setting my exercise price? What are common company practices? This is premium content

In most cases, your exercise price for stock options is...

Does the IRS have any rules on setting exercise prices? This is premium content

Only for ISOs directly, though even NQSO exercise prices need to follow the rules on nonqualified deferred compensation to avoid becoming discounted stock options. ISOs must be granted at a price which is at least equal to the...

Can I have the exercise price of a new stock option grant lowered or backdated? What is the controversy over backdating? This is premium content

Backdating has become a dangerous practice for companies, and courts have imposed prison sentences on corporate executives found guilty of backdating violations. Previously, in some new-hire situations your company might have been more flexible. Now companies try...

Can my company lend me money to buy its stock, exercise an option grant, or pay taxes on restricted stock at vesting? Can it later cancel or modify that debt? This is premium content

Yes, but the arrangement must be carefully structured not to be considered a stock option or nonrecourse loan...

Are there any rules of thumb for how many options or shares of stock that consultants should receive on a project? This is premium content

While there are no standard rules of thumb, there are methods you can try. Just as with employee grants, company grant practices for consultants vary widely even within a...

My friends at public companies do cashless exercises of their stock options. Can I do this with stock options at my pre-IPO company? This is premium content

In cashless exercises, a broker sells shares to pay the exercise price and the taxes. The broker then pays this money to your company, and you receive the net amount. In a pre-IPO company...

I am a consultant. If I have stock options in a pre-IPO company, do I have the right to receive financial statements or shareholder reports? This is premium content

As with optionholders who are employees, you are not a stockholder of the company until you...

What tax treatment applies if I exercise vested pre-IPO options that now cost more to exercise than they are worth? This is premium content

In a public company you would never exercise underwater stock options. In a private company...

Why is my private-company employer requiring me to make representations about securities-law compliance before I exercise my options? This is premium content

Whenever a security is offered or sold, either the security must be registered under the Securities Act of 1933 or there must be an applicable exemption to registration...

Why is my private-company employer making me sign a "stockholders' agreement" before I exercise my stock options? This is premium content

Private companies worry about not only compliance with federal and state securities laws at the sale of your shares but also when and to whom you may sell...

Why is dilution important to me? How do stock grants affect it? This is premium content

Dilution affects both publicly traded and privately held companies, and additional issues arise for private companies...

Can I protect myself from dilution and liquidity preferences in my pre-IPO company? Why does this matter? This is premium content

During the early stages of a company's existence (e.g. up to the first round of venture financing) you may be able to get...

I am getting stock options in an early-stage pre-IPO company. How much dilution can I expect when the company raises more private financing? This is premium content

A general formula for calculating dilution of a private company, according to experts, is to assume that...

I purchased my ISO shares in a pre-IPO company that went bankrupt without going public. Do I owe AMT? I still have not received a stock certificate proving I have shares, nor do I expect I will ever be sent one. This is premium content

The AMT adjustment for ISO exercises should apply only if there was a...

I spent a significant amount of money to exercise options last year in a pre-IPO company that not only never went public but went out of business. I also paid taxes on the spread at exercise. Is there any way I can reclaim the taxes or get a write-off for the money I paid on my worthless stock? This is premium content

You can take a loss from completely worthless company stock you own. The company must effectively be out of business, and...

Return to top of page