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Can anyone tell me more about stock option and IPO?

Dear all, ,

I don't know much about stocks and neither does my father. Here is the situation that need your help. Please give me your best answer.

My father has worked in a big company in California and he has per say 1000 shares of stock option at price of $2. We are not sure if we should exercise this stock option or not because we hear so many different version of tax issue. His company will go IPO possibly next year at price around $15, we were told we can only sell our stocks after 6 months of IPO date once we exercise.


1. Should we or should we not exercise it and wait till it IPO? It is a healthy company.

2. Does anyone know about this TAX issue? Some say once we exercise we have to pay accrued tax on gain of ($15-$2)x1000S/H, is this ture? If yes, are these tax due right away or due on next year's tax season?

3. What is the process of exercise stock options?

Thanks for you help so much!

2 Answers

  • 1 decade ago
    Favorite Answer

    hello dude, stock options are just a non monetary return for the hard work u put in an organisation. and the way u have described abt the company u r father has worked in ,,,,, it seems to be a pretty decent company making good money. let me answer you question wise:

    1. holding of shares is again a big deal as to how much time should we held them, if you are looking out for a long term investment its a good deal to retain those shares based on the propsects of the company . see exercising of shares is a different matter . it doesnt make a difference whether u exercise u r shares or not bcos IPO has no effect on u r exercise of shares. stock options are those shares which are earmarked for the employees by the company. exercising of options depends on you whethter to exercise them now or later.u can exercise u r shares now bcos what i think is u r father has already left the company and the company might put in a lock in period for the exercise of the shares like 3 or 6 months , so just check that rule and exercise the shares right now

    2. on stock options u end up paying tax i.e u have to pay tax on the gain i.e sale price less indexed acquisiton price .indexed acquisition price is the price which is indexed as per tax laws(just check u r local tax laws of california as i have no idea of tax laws ther) and if transacatin of sale of shares is thru stock exchanges and if it suffers any securtiy transaction tax then i dont think u need to pay any tax on u r gain, just check the local laws of income tax there

    3. there will be a standard template called exercise of option letter which u need to fill the required details along with u r demat account no and the proof of payment for exercise of stock options and send it to the company u have options with. the company will do the necesaary resolutions etc and will allot u r shares directly to u r demat account and there by shares are yours

    chal bye dude

    Source(s): experince gained during audit of companies
  • T J
    Lv 6
    1 decade ago

    Well, to begin with, I don't think you can exercise your option before the IPO.

    What the option is is, it says you have the right to buy the stock at the price you're given ($2). It's silly to exercise it if the stock is selling for less than that.

    Before an IPO, it's not selling for anything, and you have no one to sell it to.

    An IPO is an "Initial Public Offering". That's the point when the stock is first put on sale in the marketplace. Lots of guesses are made as to what to put it on for; educated guesses, but guesses nonetheless.

    So, your company wants to sell for $15. You have to wait 6 months. Let's say alll is well, and after six months it's still selling for around $15. Let's pick $18 for the heck of it.

    Okay - it's selling for $18. You have the right to buy a 1000 shares for $2. That means you can spend $2000, get 1000 shares, and since it's trading at $18 you can turn around and sell all 1000 shares for $18,000, thus putting $16,000 in your pocket.

    For taxes, you should take $100 and ask a CPA for an hour of their time to get advice, because I don't know anything else about your tax situation, but yes, you'd probably have to report a profit on the sale.

    Obviously you don't need to sell until you're ready (unless your options expire, which is a different case) or if it's less than your option price.

    Good luck!

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