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Subject:   stock price
Date:   Thu, 2 Nov 2000
From:   Jerry

Dear Mr. Gray:

In February 2000 I exercised my ISO stock options with [my employer]. In May 2000, I left the company. According to shareholders agreement I am required to sell my options back to the company for the price based on Average Book Value. Recently I was notified that Average Book Value will be zero because Book Value of January 1, 2000 was zero and Book Value on January 1, 2001 will be zero.

Can company sell a stock to an employee if their book value is zero as it was in my case at the them I exercised my options? Please advise.

Jerry

Answer

Date:   Mon, 13 Nov 2000

Hello Jerry,

You are raising a very pertinent question, unfortunately late.

When an employee buys employer stock, whether by exercising an employee stock option, through an employee stock purchase plan, or directly, he or she is making an investment decision. The employee should study the financial position and potential of the company before going ahead, and possibly get legal and financial advice.

Even when a company has no book value, it may have a real market value. Some of the most valuable assets of companies aren’t reported on their balance sheets, including customer lists, patents and trade secrets. There are many companies now publicly traded at values many times their book values. That’s part of the reason for going public – to create additional shareholder value. On the other hand, the stock of some companies is traded below book value on the stock market.

Evidently, you agreed to purchase your employer’s shares at an amount exceeding book value.

You might want to consult with an attorney to determine if you have been defrauded. Perhaps you weren’t given all of the facts when you made your decision.

Next time, study your stock option agreement more carefully. Get some legal advice.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.