Got your first job at a start up? This workplace perk gives you a shot at a windfall — if you’re lucky. When offered as part of a compensation package, stock options give workers an opportunity to own a slice of the company. It can be an attractive perk.
Indeed, some of the most recent companies to make their public debut are Beyond Meat and Uber. Don’t declare yourself a millionaire just yet. This employee benefit brings plenty of complexity, as well as a potential tax bite. “We’ll get a phone call from a client, ‘Hey! I got options!’” said Dan Herron, CPA and partner at Better Business Financial Services. “Great, but what did they give you?” he asked. “There’s a big disconnect between the information provided to them versus what we actually see.”
If you’re getting on the ground floor of what could be the next Peloton, your stock options generally will have a pre-set value assigned to them. You may be granted a certain number of shares based on performance or as part of a compensation package.
Funding rounds from investors drive the value of a private company, but if there hasn’t been a funding round, the company will hire a third-party to determine its value, said Eric Bronnenkant, CPA and head of tax at Betterment. “What’s the company worth?” he asked. “It’s a tough question. Is their worth based on earnings? On assets? On free cash flow and the types of products they expect to bring to market?”
There are some limited opportunities to trade shares of a pre-IPO company on a private market. However, the board of directors at your firm will need to approve the share sales first, Bronnenkant said.