Cheap IPO Stock Options
- Private companies grant stock options to their employees through a four-year vesting process designed to ensure the employee earns her benefits. An IPO can motivate people who hold stock options in private companies to buy, sell or use stock options. Some employees sell their options to accredited investors in online marketplaces. Accredited investors have a net worth of over $1 million or an annual salary between $200,000 and $300,000, according to Fox Business. FINS Finance reports that many options holders sell their stock options because of market conditions, a delay in announcing an IPO or simply because doing so is profitable.
- The value of stock options in a private company is largely determined by the percentage of the company it will entitle the bearer to buy, as well as by an estimate of the company's overall value. However, once a private company announces it is preparing an IPO, the option's value is determined by comparing its strike price to the price per share announced as part of the IPO. A strike price is the price at which the bearer can use the option to buy actual stock.
- A low price doesn't always translate into a good value or promising investment. Though a precise quantification of a stock option's value once it is executed is impossible to discern, consider factors such as the company's market share and any instability or volatility in that market before buying. If you have more than one choice of pre-IPO stock options for the same company, determine which will be the best fit for your investment portfolio by comparing each choice's strike price and deadline to use the option to buy stock.
- Company founders and other executives have had the opportunity to sell their pre-IPO stock options since investor demand for tech companies became insatiable in the late 1990s, according to FINS Finance. To ensure you don't sell your options too cheaply, Fairmark suggests estimating the option's value based on time constraints governing the option, such as the deadline for using the option to buy stock, as well as by ignoring projections of market instability.
