Is my company required to hire an independent source to determine the fair market value of shares?

May 29, 2002

Subject:   Question – non-qualified stock options
Date:   Wed, 24 Apr 2002
From:   Gerald


I have a few thousand non-qualified stock options from a start-up firm that I worked with until a few months agao. In mid-June, my rights to exercise these options will expire. The company is not publicly traded, probably has no revenue, and aside from some proprietary software, may have little value.

The option price is for a penny a share. I can exercise the options for less than $100. I understand I will have to pay a tax based on the value of the stock on the date of exercise.

Is the company required to hire an outside, independent source to determine the fair market value of the shares? How long is the valuation valid?

Any help you can provide would be greatly appreciated.



Hello Gerald,

Employers whose stock is not publicly traded are given quite a bit of discretion in determining the value of their stock relating to employee stock options. They are not required to retain independent appraisers. They are required to make a “good faith” determination of value.

Typically, the board of directors declares a value for the stock for some period of time.

You should consult with whoever is in charge of administering employee benefits for your company to find out how your company handles this and the values to be used when you exercise your options.

In your case, it probably isn’t worthwhile to get in a huge argument over this matter.

Good luck!

Mike Gray

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

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