Question: How do stock options work?

1) Let's say a firm rewards its worker with stock options. This worker decides to exercise the options. Then the firm should give out its common stocks to the worker. Where do these stocks come from? The firm issues brand new stocks through SEC? Do they come from treasury stocks?

2) Let's say a firm is going through IPO. It issues 2000 of hot IPO shares through SEC. What happens to 500 existing stocks that are held by people who bought the stocks before IPO through private investment? They are also automatically registered through SEC? So the market cap is 2500?

Thanks!

Answer:

1) The stock could come from treasury stock or is simply issued from authorized but unissued stock. And no the company does not need to register those shares with the SEC. However, if the shares were never previously registered with the SEC, then that would be restricted stock, subject to Rule 144, and could not be sold on the open market for at least 6 months. There are additional sales restrictions of unregistered restricted shares, as to size, timing. etc. but they would NOT have to be registered with the SEC to be sold on the open market.

2) Generally when a company is registering shares for an IPO with the SEC for sale to the general public, they also simultaneously register the shares of previously issued stock previously sold to holders of private placement pre-IPO and shares of employee stock option plans. Only the officers and major shareholders (owning over 5% of the company stock) are generally subject to some lock-up agreement. The market capitalization (or cap for short) is the VALUE of the outstanding shares times their sales price/share. The 2,500 shares in your example above would simply represent the number of outstanding shares.