At what point can par value no longer be used with restricted stock?


3

I have a web site that I own restricted stock in. When I purchased the equity, all I had to pay was par value for the stock (.001 per share I believe). I'm now looking to receive more equity.

Should the cost still be par value? And if not, what would determine whether it has to be higher. Whether the site is making revenue? Expenses used to construct it? Site traffic?

Equity

asked Oct 5 '12 at 12:32
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Billy
16 points

2 Answers


1

Valuations are based on expected cash flows. It is a long and tedious calculation if you want to do it its called discounted cash flows (DCF). There are three main methods of valuation, most people use DCF or a multiples approach. Wiki can give you formulas, etc. a corporate finance class will teach you the basics. Par value means nothing in terms of valuations... Essentially the question to answer is: how much is the money that my company will produce over the next five years (and terminal time) worth today based on interest rates, and other costs of opportunities...

answered Jan 5 '13 at 03:46
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William Falcon
111 points
  • Just out of curiosity, why 5 years? Why not 3? Why not 10? – rbwhitaker 6 years ago
  • Industry standard is 5 years of fast growth (these are projections), no one projects further out than 5 years. Then year 6 is terminal, meaning slight growth (3-8%) per YoY. DCF is split into explosive growth and terminate growth – William Falcon 6 years ago

0

You need to understand that the difference between the "par value" that you paid and the actual (fair market) value is an income to you, and you'll have to report it and be taxed on it. Different countries manage it differently, in the US once the restriction is lifted (i.e.: the restricted stock becomes vested), you have to report gain (which is not capital gain) on the difference between what you've paid (0.001 per stock) and what its really worth on the day of vesting.

For many startup investors that invested in the early stages that difference may be extremely significant. When investing at startups, or restricted shares that you expect to appreciate significantly, make sure to talk to the tax adviser before investing, to learn what to do and how to avoid the huge tax bill you may end up getting when it vests.

You can pay for restricted stocks whatever, doesn't really matter. Most people don't pay anything at all. Why? Because its only yours when it vests, and its then when you also pay taxes on the difference between the price paid (if at all) and the real value of the property received. Unless you had a good tax adviser to mitigate that, which apparently you hadn't if you're asking the question.

How the "fair market value" is determined? This is called valuation and is done by independent accountants.

answered Oct 5 '12 at 17:51
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Littleadv
5,090 points
  • Thanks for the answer. During the first round of equity, I filed an 83b-election, which is a payment upfront (par value * number of shares) so I don't have to pay what you mention. The reason I'm asking this is I'm wondering if par value still applies if my web site has grown? It's not making any money or getting a lot of traffic, so can it still be valued at par value? – Billy 6 years ago

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