When factoring stock options in your financial plans, it is easy to get enamored with numbers that float around the internet about tech companies creating millionaires when they achieve success.

And why not?

Take the example of Google. The global internet search engine giant made its employees millionaires when it went public in 2004. Around 17.7 million shares worth $5.3 million got converted to a whopping $1.7 billion on the first day of trading itself.

While Silicon Valley is one giant case study, there is no dearth of examples in our own backyard.

Information Technology company, Infosys, instituted employee stock option plans (ESOPs) way back in the 1990s. Infosys became a publicly listed company in 1993.

By the admission of its founder, NR Narayana Murthy, some of the peons who kept their shares over the years are millionaires. Their shares, he shared, are valued between ₹10-15 crore.

So, if you today own stock options in a private company or startup, then you do have the opportunity to create wealth and walk toward the path of financial freedom.

So, are my pre-IPO stock options worth anything?

Yes, and no.

All stock options intrinsically have a value assigned to them that grows as the company sees growth in its valuation. But as you’re already aware, the lack of a public market to sell your shares means it is hard to assign an actual number that you are assured of.

But an IPO isn’t the only way, right?

Correct. There are typically a couple of different ways that help people cash out their stock options: buybacks and acquisitions.

Buybacks are relatively simple. The company uses excess cash in hand to reward stock option holders by buying the shares back at their last-known valuation. A merger or an acquisition can be a little more tricky, depending on deal conditions.

Deal Conditions

All transactions and options come with certain conditions.

For example, when Flipkart was acquired by Walmart in 2018, some of the former employees voiced concerns about unfair treatment as according to the deal they could only encash 30 per cent of their total stock holdings while the current employees had the option to encash their stocks in entirety.

In all of these scenarios, you will owe taxes!

In India, you are taxed at two instances when it comes to ESOPs. One is when you exercise your right to buy the shares, and the other when you sell your shares in exchange for cash.

So, how should I go about this?

We wish there was, but there is no one-size-fits-all approach here.

That’s because you don’t know whether or not your startup is going to become successful enough to provide liquidity for your stock options. You could very well see the value of your stock options grow 100x from now to liquidity, but it may fail completely too, bringing the value down to zero.

Consider it an investment like any other, except one that has low liquidity and higher-than-average risk. We hope it works out for you!