Must I accept my employer’s valuation of their stock?

December 10, 2003

Subject:   Valuation of a Private Company
Date:   13 Nov 2003
From:   GLW

I hold vested NSOs in a private company and would like to exercise but the owners of the company are putting an unreasonable valuation on the company and making it impossible to consider given the tax consequences. I think this is because these options expire in 2 years and they represent about 8% of the company.

They say the FMV for the company is $5 per share and I say it is $2 based on industry conditions and comps. Even if we do agree on the FMV for the company, how do you come to an appropriate price for the minority stock that is severely restricted by a shareholder agreement?

Do I have any alternative paths to pursue? Can you refer me to similar precedent or law?

Appreciate the help.



Date:   24 Nov 2003

Hello GLW,

The fair market value of stock that is not publicly traded is a difficult one. If the issue is litigated, it is a question of fact to be established by the taxpayer.

The employer is given considerable leeway in its representation of value, but the employee can dispute the value asserted by the employer. The best way to do this is to get an independent appraisal by a qualified appraiser. This is an expensive process and usually requires the cooperation of the employer’s accounting department. Employees in this position are entitled to valuation reductions for lack of control and lack of marketability.

There is clearly a conflict of interest in the value determined. The employer gets a tax benefit in the form of a higher deduction for a high value. The employee prefers to minimize income, favoring a low value.

Find out if there are other employees in the same position as you. Maybe you can split the cost of an appraisal. You will want to work with a tax return preparer who is an attorney, CPA or enrolled agent on this issue.

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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