Pre-IPO Quiz

Stock compensation in pre-IPO companies can be very profitable if the company goes public or is acquired by a publicly traded company. However, the rules for equity compensation and stock in privately held companies can be tricky. See how much you have learned about equity awards at pre-IPO companies.

Please answer the following 10 questions. This quiz is also a course of study. The answer key links to content on the topic for follow-up reading. For in-depth courses of study that offer CE credits, see the myStockOptions Learning Center.

1. How does a pre-IPO company formally determine the value of its stock?

The compensation committee uses the Black-Scholes model or a binomial model to calculate the stock’s value The company looks at the stock price of its closest publicly traded competitor The board of directors hires a valuation firm to estimate the fair market value of the company’s stock Any of the above

2. How can a privately held company create liquidity for its stock?

It can become a publicly traded company by registering with the SEC and making an initial public offering to investors It can be acquired by a publicly traded company that preserves the equity awards after the completion of the deal It can include buyback provisions in grants, letting employees sell their stock back to the company, or it may allow limited resales to investors Any of the above

3. Are there restrictions on the ability to resell the stock of a pre-IPO company?

The company cannot stop you from selling shares, but the securities laws prohibit the resale of stock that is not registered with the SEC The securities laws do not prohibit the resale of stock in pre-IPO companies, but the company can impose contractual restrictions on resale No regulatory or contractual restrictions can apply to resales, but is not easy to sell stock in privately held companies The securities laws restrict resales of stock not registered with the SEC, and companies can impose contractual limitations on resale

4. 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?

Yes, the vesting can be based on the occurrence of a liquidity event (e.g. an acquisition or an IPO), but only if the stock is issued under Rule 701 Yes, the vesting can be based on the occurrence of a liquidity event (e.g. an acquisition or an IPO) that gives market value to the underlying stock No, the securities laws prohibit the use of a liquidity event as a vesting requirement Under the securities laws, vesting can be based on an IPO but not on an acquisition by another company

5. Can privately held companies grant restricted stock or restricted stock units?

No, federal regulations permit only stock options or stock appreciation rights only at pre-IPO companies Yes, restricted stock and RSUs have become popular grants for some pre-IPO companies Only after the company registers for an IPO with the SEC Only before the company registers for an IPO with the SEC

6. What are early-exercise stock options in privately held companies?

Stock options that can be exercised before their vesting date, subject to a repurchase right by the company Stock options that have no vesting schedule and can thus be exercised at any time Stock options that can be exercised into restricted stock units that have no vesting schedule Stock options that entitle the optionholders to dividends after the company goes public

7. Why do some pre-IPO companies offer early-exercise stock options?

These allow employees to start the capital gains holding period on the shares sooner than they would if they were to wait for a liquidity event They can reduce the chance of the alternative minimum tax on incentive stock options They can reduce the chance of ordinary income on nonqualified stock options All of the above

8. Is the date for determining taxes at exercise or vesting delayed if the stock I receive is not registered with the SEC and I cannot immediately sell it?

No, a resale restriction under the securities laws does not delay the tax-measurement date No, but the IRS will grant a delay in certain extreme circumstances (e.g. a financial emergency) Yes, a resale restriction under the securities laws also delays the tax-measurement date The tax-measurement is delayed only for stock issued under Rule 701

9. What is a lockup?

A publicly traded company's formal commitment to buying a privately held company A contractual restraint on selling shares for a specified period after an IPO or an M&A deal A blackout period before an IPO to prevent insider trading A confined space where recalcitrant employees may be temporarily detained

10. For pre-IPO options and stock issued under Rule 701, how long does Rule 144 require you to wait before selling the shares?

Twice the length of the company's lockup period Half the length of the company's lockup period 90 days, though the company's lockup period may prohibit sales for longer 120 days, at which time the company's lockup must also end

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