Hannah Widlus Quoted in Forbes.com

The regular Straight Up Column in Forbes.com on May 16 on "Startups And Stock Options" highlights how startup companies can best use stock options to effectively use them to attract top talent  - - and how to be aware of any pitfalls.   "Stock options have helped hatch numerous powerhouses, from Google to Starbucks, based on the notion that talented employees with real entrepreneurial zest and a belief in the business model will choose to pass on a paycheck today for the chance at some real money down the road. The taste of ownership also tends to align the goals of management and the hired help.

"The biggest problem for startups that offer stock options: Placing a value on them. Under Internal Revenue Service Rule 409A, a stock not readily tradable on an established securities market must be valued by "the reasonable application of a reasonable valuation method."  Translation: If a startup undervalues the exercise price of a stock option grant, there could be adverse tax consequences for the option holder.  For example, suppose you, a new employee, receive options on 10,000 shares, each with an exercise price of 50 cents; meanwhile, the company is really "worth" $1 per share. According to the IRS, you reaped a benefit of $5,000 and thus owe taxes on that amount--even though you received no cash. And given that the stock is privately held, you can't readily sell the shares to pay those taxes. Worse, if IRS finds out about it years later, you'll be on the hook for interest and penalties. Nightmare scenario.  The best way to avoid any problems is by getting an appraisal (within the last 12 months) from a certified valuation firm. Typical cost: $5,000 to $10,000. Other startups can find safe harbor in valuations done by a bankers, venture capitalists or accountants, says Hannah Widlus, a partner at Seyfarth Shaw. In some cases, a company's board can take a stab at the calculation. (Warning: Often board members are paid in options, so they may have incentive to price the options below market value.)