Stock Options

Samsonite1

Hello,

I am not sure if this is the right section, but it concerns stock options at a pre-IPO company.

If you have stock options - does the value remain the same all way until the IPO? I am just unsure of what the numbers mean. So if you have £X amount of stock options from 2015 and the company has their IPO in 2018 - what is likely to happen in terms of value?

Sorry if the question is rubbish!

Malthusian

Not 100% sure I understand the question. Presumably you can't realistically sell them until the IPO, so does it matter how much they are worth before then?

Anything could happen to their value when they IPO. They could rocket up as investors pile in, or they could tank if the public markets don't think they are worth the initial asking price.

In general, bookrunners (the bank or whoever is arranging the IPO) prefer to underprice IPOs, but occasionally they screw it up.

When are you allowed to exercise your options and sell the shares?

Samsonite1

Malthusian wrote: »

Not 100% sure I understand the question. Presumably you can't realistically sell them until the IPO, so does it matter how much they are worth before then?

Anything could happen to their value when they IPO. They could rocket up as investors pile in, or they could tank if the public markets don't think they are worth the initial asking price.

In general, bookrunners (the bank or whoever is arranging the IPO) prefer to underprice IPOs, but occasionally they screw it up.

When are you allowed to exercise your options and sell the shares?

It says in a statement that I have stock options (ISO) of a certain number of shares with a "Total Exercice Price" and "Early Exercise = No" so I guess that means I can do nothing until IPO.

But I wondered how the share price came about at such an early stage (book-runner/bank or someone doing a valuation?). My assumption (and probably completely wrong) is that they will not go down in value as the company will not IPO until they hit certain targets - I suppose that is the idea anyway.

Is the number of shares essentially the important fact until the IPO? I.e. when the share price is set at IPO then I will truly know the value of my shares (because I can then exercise them).

It is probably more important to think about what to do with the shares when it comes to it!

Malthusian

Samsonite1 wrote: »

It says in a statement that I have stock options (ISO) of a certain number of shares with a "Total Exercice Price" and "Early Exercise = No" so I guess that means I can do nothing until IPO.

But I wondered how the share price came about at such an early stage (book-runner/bank or someone doing a valuation?).

I would imagine so. The shares still have a value even if they aren't publicly traded, putting a value on them is a routine job for an investment bank or accountant.

My assumption (and probably completely wrong) is that they will not go down in value as the company will not IPO until they hit certain targets - I suppose that is the idea anyway.

There is of course the possibility that the company never hits those targets and never IPOs, which would render the share options effectively worthless if they can never be exercised.

Is the number of shares essentially the important fact until the IPO? I.e. when the share price is set at IPO then I will truly know the value of my shares (because I can then exercise them).

Yes. If your share options give you the right to buy shares at £20 a share they are worthless if the IPO disappoints and you could buy shares on the open market at £10. On the other hand if the IPO happens and they trade at £50 you've done very nicely.

It is probably more important to think about what to do with the shares when it comes to it!

Absolutely - it is a common mistake to hold on to shares in your employer because you feel emotionally attached to them or because you have a misguided sense that you have insider knowledge. It is a big risk because if the company goes bankrupt you lose both your job and your savings.

OldMusicGuy

A stock price will be set just before the IPO based on a valuation of the company and its future earnings. That is effectively the "launch" price of the stock which is the estimate of the "best" price the valuers think investors will pay. Once the IPO happens, the stock is free to trade on the open markets and so the price may go up or down.

So prior to the IPO you will get a price set for the stock. Depending on the way your options are calculated, you will then know either the possible value of your options (if you have been given a specific number of shares) or how many shares you will get (if you were given a value of "x"). It's up to you whether you sell any, some or all straight after IPO.

Juts to make you anticipate the excitement, I was working in the Bay Area just before the dot com boom. My neighbour was an exec at one of the early internet companies and they did an IPO. He got a pretty hefty chunk of stock options at $20, including 1,500 shares for "friends and family" (that he could just give away as he saw fit). Within one week of the IPO at $20, the stock was trading at nearly $80. Within a few years the bubble burst but I hope he sold before then!

Samsonite1

A related question has just come up. What do I need to consider regarding a secondary/tender offer? My thinking is that unless the price is an amount that would make a difference in life, I would rather keep it invested until IPO...