Pre-IPO: Basics
Articles (Jump to FAQs)
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.
Alisa J. Baker
NEW! 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.
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.
Keith Sellers, Yingping Huang, and Brett King
Journal of Accountancy
Three professors at the University of North Alabama explore the accurate valuation of stock options at private companies, and how this differs from valuation at public companies.
Katie Hafner
The New York Times, 11/12/07
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.
Ben Charny
MarketWatch, 2/9/07
The YouTube millionaires are a dramatic, if unusual, reminder of the riches that stock options can create. The YouTube phenomenon may even give stock options new luster as a technique for recruiting employees.
Jessica Guynn
San Francisco Chronicle, 11/12/06
Stock options remain a powerful lure for attracting employees to private companies, although attitudes and expectations have changed. Stock options let you participate in the value you're creating at your company, and their potential ranges from substantial wealth to nothing at all.
Michelle Kessler
USA Today, 9/11/06
Stock options remain a key financial lure at startup companies and motivate employees to work long hours.
Tom Taulli
Forbes, 5/16/06
Stock options remain alive and well at early-stage companies, which continue to embrace the idea that talented workers with entrepreneurial foresight and a belief in the business will accept options over cash for a chance of large financial gains in the future. An ownership culture fostered by stock options can also align the goals of managers and staff.
Lisa Yoon
CFO.com, 7/26/05
As stock option expensing causes public companies to reduce stock grants, it similarly affects stock grants at private companies. The pay packages at private companies can now more evenly match those at public companies, and private companies can offer more generous option grants.
Timothy Roberts
Silicon Valley/San Jose Business Journal, 12/24/04
Even with expensing, stock options remain popular for new hires. New attitudes prevail about stock options, but restricted stock is not seen as a good alternative at pre-IPO companies. (Registration is required.)
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FAQs (Jump to articles)
Typically, only for-profit corporations are eligible to offer stock options...
If your employer is a for-profit corporation, it probably can offer stock options to its employees. There may, however, be many reasons why your employer is not offering options...
Yes, though for two reasons S-corporations generally do not issue stock options. First...
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...
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...
Valuation of private-company options and stock is more an art than a science. You can ask...
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...
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...
Private companies often include in the grant agreement the right to buy back the vested shares. The repurchase right can be based on...
In most cases, your exercise price for stock options is...
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...
Previously, in some new-hire situations your company might have been more flexible. Now companies try...
No. Just as with employee grants, company grant practices for consultants vary widely even within a...
The tax treatment for private, pre-IPO, and large publicly traded companies is...
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...
As with optionholders who are employees, you are not a stockholder of the company until you...
In a public company you would never exercise underwater stock options. In a private company...
Most private companies make shareholders obey contractual and securities law restrictions on transfer. The most common limitations are...
As the IRS confirmed in Revenue Ruling 2005-48, the tax-measurement date...
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...
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...
Dilution affects both private and public companies, and additional issues arise for private companies...
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...
A general formula for calculating dilution of a private company, according to experts, is to assume that...
No. You do not want to exercise underwater stock options. You can buy the stock for less in the open market...
The AMT adjustment for ISO exercises should apply only if there was a...
You can take a loss from completely worthless company stock you own. The company must effectively be out of business, and...
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