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No. Valuation of stock in pre-IPO companies remains as much an art as a science. However, as the company nears the actual IPO, reliable benchmarks exist for determining the value of its stock (e.g., comparisons to recent IPOs of similar companies). Your company can base the exercise price on that fair market value.
During the IPO registration process, the SEC looks for any "cheap stock" that has been issued to insiders at unrealistically low exercise prices within at least the prior year. "Cheap stock" exists when employees are granted extra compensation with discounted options. No bright line exists to determine what "cheap stock" is. It's a myth that companies can price options at 10% of the value of the preferred stock.
Your exercise price may be readjusted, and your company must make an accounting adjustment for any discounted or revalued options. Therefore, to avoid the wrath of the SEC, any extra compensation accounting charges, and even concerns about the backdating of stock options, companies are wary of setting exercise prices too low. Discounted stock options also raise tax issues for you and your company under the deferred compensation provisions of the American Jobs Creation Act (AJCA). Example: According to the Analyst's Accounting Observer, in Google's IPO registration statement of April 29, 2004, the company added $75.4 million to its deferred compensation account during the first quarter of 2004 for the "excess value" of its options (i.e., fair market value above exercise price). |
