Print This Page

Date:   Sun, 3 Jan 1999
From:   Rich

Background:

I am working for a company preparing to go public in the next 12-18 months. They have given me some stock options.

My questions:

1) How do I calculate the value of the options when the company goes public? For instance, if there are 100M shares and I have 10,000 options, is there a formula that relates to their relative value?

2) For argument's sake, let's say the company is valued at 250M when it goes public. How do you calculate value per share?

3) Is there a relationship between the number of shares/options one has relative to the total number of shares?

Answer

Hello Rich,

Your three questions essentially boil down to one - how do I value my employer's stock for these transactions, when it's not publicly traded?

The short answer is, you shouldn't have to. Go to whoever is responsible for employee benefits in your company and request that the company provide a letter with the information you need, the fair market value of the stock on the date of exercise or when restrictions lapse.

Valuation is a very complex issue and determining it is an expensive proposition. Since the employer is providing these options to you, the employer should also provide the information you need for tax planning and for preparing your income tax returns.

For non-qualified options, the employer may be required to report the spread between the fair market value of the stock and the option price as additional compensation with your payroll information, and to withhold payroll taxes.

For additional information, you should request our special reports, Incentive Stock Options - Executive Tax and Financial Planning Strategies and Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

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.