Startups Stack Exchange Archive

Fair Market Value

• posted by: Loki Astari on 2016-08-20
• tagged: stock-options, valuation
• score: 2

In the US (specifically washington state).

Are there any laws/rules/expectations about the company re-evaluating their Fair Market Value after a mass layoff?

This will definitely come into play for those that were just layed off as they will usually have a limited time in which to choose to exercise any vested options but given that the company is having a hard time staying afloat there value should be much diminished.

Answer 10969

• posted by: Denis de Bernardy on 2016-08-20
• score: 2

Short answer: There are none, or at least there are none that are sensible or sensibly enforced. If the transaction and the tax implications make sense now, then safely exercise the options and sell on the spot; if not, buyer beware.

First off, note that there are about as many methods as there are people doing the valuation. Books could and have been written on the topic and none of them sketches out a methodology that is more right or more wrong at the end of the day. To give but two starting points if you’d like to read more on the topic:

• https://en.wikipedia.org/wiki/Business_valuation
• https://en.wikipedia.org/wiki/Market-based_valuation

Next, one needs to realize that at the end of the day the only thing that really counts is how big a check a buyer is willing to write to get a piece of the action. If someone tells you “this company is worth $x”, your immediate question should be “who’s the buyer?”. Until the check is written and the transaction is done you simply don’t know if the valuation is correct or not.

With this in mind, Fair Market Value has several meanings depending on who you ask:

• From the company’s standpoint, it’s primarily about public relations towards share holders, with the company stating “we’re worth this much” - i.e. it’s wishful thinking at its best if you scratch beneath the surface, and it’s usually of no consequence unless the company engages in stock repurchases (pages 4-5 for a primer).
• From a seller’s standpoint, it’s of course the amount of money they’d like to get in exchange for their stock - i.e. it’s wishful thinking because it ultimately depends on finding the buyer willing to pay that much.
• From a buyer’s standpoint, it’s the amount of money they’re willing to write down on a check with the hope of making a profit from it - i.e. it’s also wishful thinking, and the price a buyer is willing to accept entirely depends on the buyer’s intent.
• From a financial analyst’s standpoint, it’s the amount of money they recommend their clients to write on checks based on whichever valuation model they’re using - i.e. it’s just a number, whose accuracy can range anywhere between wild guess based on some hocus-pocus, and more or less educated guess, with some occasional fraud thrown in to spice things up.

Stock market dynamics help in each of these respects, because - at least in theory - with enough liquidity in the market you can easily find buyers and sellers at a generally accepted price point. That price point is the only sensible definition of Fair Market Value: it’s what the stock is actually trading for today. You may or may not agree with that price (leading you to think it’s not fair), but that price is what the market currently considers fair.

That being said, with respect to stock market, beware that:

• There’s no telling what percent of trading today is the result of actual people purchasing or selling. A non-negligible part of the market liquidity nowadays comes from bots and high frequency trading algorithms that buy and sell from one another. When that artificial liquidity disappears overnight or when the algorithms otherwise go haywire, you get events like the 2010 flash crash or the 2007-2008 financial crisis.
• Naked short-selling shenanigans and the fraudulent behaviors that surround them are a thing. Failure to deliver does happen. That is to say, the “virtual” stock unit that you just bought from your online brokerage account or that’s sitting in your retirement fund may or may not be backed by an actual stock; sometimes the stock doesn’t clear within the time limit imposed by the SEC (if ever at all).

Conclusion: if you’re risk averse, exercise your options if and only if you have a buyer lined up and will make money after paying the taxes that will apply. If you aren’t risk averse, you’re gambling - and that’s fine, as long as you’re aware that you’re gambling.

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