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Subject:   Pre-IPO Stock Options
Date:   Tue, 29 Aug 2000
From:   Randy

I noticed your web site and your review of the book "Employee Stock Options".

I am looking for professional assistance regarding a possible job with a start-up which will include stock options. I want to understand what the correct methodology would be in order to obtain enough money through stock options to retire. For example, if I determine that it will take $1.5M to retire, how much do I need to start out with before taxes? How will company policies impact that ability (vesting, lock-out, etc.)? Can you or someone you know provide this type of assistance?

Answer

Date:   30 Aug 2000

Hello Randy,

There is no "magic formula" relating to planning for retirement with employee stock options.

The key is to be fortunate enough to work for an employer company that is generous in granting options and then for the company to do fabulously well, like Cisco Systems or JDS Uniphase, so the options become immensely valuable.

You need to carefully evaluate the investment potential of the employer. Most start up companies crash and burn within a few months after going public. By the time the employees can sell their stock, it has lost most of its value from the initial high after the IPO. If the company does well, the stock will continue to grow in value. Then you need to decide when to sell your stock.

This is a high-risk type of retirement program compared to a regular savings and investment program. The great thing about it is you build equity with your labor.

I hope this helps.

Good luck!

Mike Gray

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.