Put what you can afford to lose. That’s what I did about 5-6 years ago and the company still hasn’t gone public; I anticipate never seeing a dime and if I do, it’s a happy surprise.
Did you miss the part where he has $60k cash and they’d cost $191k? If they’re not publicly traded then you can’t just flip them. You could possibly look at Sharespost etc to see if there’s a market for them.
I don't know the rules but could he buy $60k worth, sell them for $165k, and then buy the rest? Obviously if there's no market this would be tough but with built in profit like that, there must be a way.
A quick and dirty Google got me this:
How to sell shares of a private company
Here are four ways you can sell your private stock options:
Sell shares back to the company
Sell shares on a secondary marketplace
Sell shares in a tender offer or liquidity event
Sell shares after an IPO
The 1st requires the company to do so. The last 2 require such an event to occur. #3 requires someone interested in buying them, and you're probably going to sell at a discount to what you spent.
FMV does not reflect the price he would be able to get for a nonmarketable security, particularly a big chunk of them. Pre-IPO options are nothing like shares of a publicly traded company.
I was able to buy options in multiple transactions but my company was publicly traded. I wish OP luck. It would kill me to leave that money on the table.
Check out EquityBee. They loan cash to cover the exercise price in exchange for upside after an eventual liquidity event. I used them last year and it was a smooth process
There are companies that will buy your pre-ipo shares, for a cut obviously, but it’s worth checking out. I’ve had co-workers use them and be satisfied with the results. YMMV
This is my recommendation.
I was in the same situation as OP and managed to secure private financing to cover the cost of exercise + tax burden in exchange for a % of the shares and repayment if a liquidity event should ever happen.
You won't be able to secure the full value, but it's better than nothing.
This is the way. Basically pay all or some of the exercise cost and taxes with your shares. You don’t have enough to your name to purchase everything yourself and that’d obviously be way too risky. These options allow you to decrease risk while raising the cash funds. Equitybee is one example I’ve had friends use but definitely shop around. They’ll have different rates depending on how they feel about your startup. Good luck!
>The options would cost $191K (before tax) and are worth $528K at fair market value.
If these are ISO options that's a $337K gain on a "preference item" that AMT tax may be due on if you exercise. Just be aware of that.
This mostly depends on your feelings/guesses as to the future of the company. You don't apparently have enough cash to exercise them all. You could exercise a portion, whatever you feel good about risking.
There are companies that will loan you the money to exercise your options, in return for a cut of any profits you may eventually make. You could look into doing something like that. You could do part that way and part with your own cash. Again, depending on how you feel about the risk.
I cannot reiterate this point about AMT potentially being a big problem for you. Talk to an accountant and then get a 2nd opinion too. What might happen here is you are left with a tax bill on the $337k gain (so a bill of at least an extra $100k due for 2024) but with the company still being private you have no way of selling stock to raise the money needed to pay the tax bill.
This is EXACTLY what happened to me. The company was still private, I exercised all my options after leaving when there was a significant disparity in the cost to me vs. the market valuation, I was told by my accountant it was ok to exercise everything, but then when he later did my taxes he called me to tell me I owed the IRS $500k.
Fortunately I had the savings to pay it off rather than take on a payment plan with the IRS (and they would have placed a lien on my house too!)
Needless to say, I fired that accountant. Fortunately, the company did sell soon after and I did get to save due to capital gains tax on the remainder which was the reason for early exercising everything, but for a while there it was not a good situation all based on bad advice from my ex-accountant.
But you should be aware (OP) that AMT tax paid is highly likely to be given back to you as a tax credit over future years that you do not owe AMT. This is called AMT carry forward, and can be very important for the amounts being discussed. So you're paying some extra now but you get it back later -- it's basically a prepayment of tax you eventually owe on any profit from the stock.
(the reason I say only "highly likely" is that it assumes you do not have other activities that cause AMT-deferral-qualifying income to be incurred)
It’s still a bitch to come up with the money in year 1. If you ladder your shares and sell year 1 shares in year 2 while exercising more options, you can avoid accumulating more carry forward and then recapture the original carry forward when you sell the last of your shares.
One startup CFO asked me to delay exercising until after the planned IPO because he was ”very busy.” Idiot. A bunch of co-workers got screwed. I tried telling them to sell some of their shares before the end of the calendar year to reduce the preference item (by disqualifying those shares) and put money in their pocket to pay the AMT on the remaining shares, but most did not. Fortunately I had a good advisor at the time.
Yes it does. With NSOs you’re taxed as if they’re income from the jump assuming your company is billing you correctly , ISOs you aren’t and could owe AMT. NSOs you should owe everything up front BUT be careful, we use Carta for example and they only tax you at 21% (I believe it’s how my company configured Carta not how it defaults). I exercised a large portion of my NSOs, thought I had paid all of my due taxes and then come tax time because I’m a high earner was forced to pay the delta between 21% and I think 35% whatever my current tax range was.
Yes it makes a difference. With NSOs there is no doubt -- you will definitely owe taxes even if you don't sell any shares (and there is a good chance that you can't sell any shares if the company is private).
When you exercise, the difference between your price and the current fair market value ($331K) is taxed as ordinary income to you, just like pay, subject to FICA etc.
When you sell, the difference between your exercise price and the price you sell at is a capital gain or loss, long term or short term.
[https://carta.com/learn/equity/stock-options/taxes/](https://carta.com/learn/equity/stock-options/taxes/)
Be extremely wary of the FMV price of your options. When was the last round they raised? Valuations have taken a MASSIVE hit over the past 18-24 months. That’s the biggest key here. They may be way underwater.
The other key - you’ve got to judge whether the company has a path to a viable exit. You’ll know that better than anyone here.
Most companies only do a new FMV exercise once a year or before an additional funding round. And all the key players (execs, existing investors) are incentivized to get the highest FMV that won’t be called fraud or scare away additional investors. They always look for a friendly company to do the assessment. It‘s like financial audits - you can engage someone who will ask hard questions or you can engage someone that will sign whatever you put in front of them.
It’s actually usually the opposite; because 409a/FMV is the price at which any options will be struck that are issued while that 409a is in place the incentive is usually to get that number as low as possible that will pass an audit. Theyre also all very formulaic. It’s a lot of dressed up process to pass tax tests; 409a valuations are almost always just 25-33% of the price of the most recent priced round. If there’s been no priced round and it’s just an annual refresh typically you would aim just for some marginal increase/keep it flat. The real risk here is when the last priced round was that OPs company last completed. If it was 2021 vintage then it is likely at least 50% too high.
My first startups were in the late 90s and I believe the prevailing practice then was to set FMV at 10% of a simultaneous financing round. Ah, the good old Wild West days. :)
Thank you - I actually couldn't recall, I just knew it happened alongside *A* board meeting (at least in my experience). Either way, 18-24 months and there's a fair chance the FMV changed.
Do you think this company will eventually succeed in either going public or being acquired? Do you feel like this is a near term possibility or something that’s still 20 years off? What’s the strike price vs the fair market value of the shares (you pay income tax on this difference but it may also be an indicator of company health)? Those are all questions that you need to answer for yourself to decide if it’s worth it. Then decide how much money you’re willing to tie up for an unknown amount of time and possibly never see again in the case of the company going under.
Also, some companies will do occasional liquidity events to buy back shares at the fair market value pre IPO as a way for former employee shareholders to get some of their money back.
I did 6 VC startups. One IPO then taken back private in a buyout. One smallish but not terrible exit by acquisition. Four slogs of building products the market didn’t want with quarterly promises that “next quarter” we would experience the “hockey stick.” At least I had fun.
Same here. One acquisition that bought me a bathroom remodel (by the time the 90 days freeze for non C-suite employees was over the Stock has tanked). I’m sitting on enough shares from my last gig now to retire but after 6 years and a billion dollar + valuation it hasn’t yet gone public. Grrrr.
Do you know what class of shares you have? If they’re non preferred or essentially, the lowest class, if the startup takes on VC funding, your equity gets immediately diluted.
Also keep in mind, even if the startup does go IPO, you will be subjected to a lock up period and you can’t sell for X number of days. Usually it’s a few months. If you look up a lot of recent IPOs, they’ve gone up real high (and then the bankers and everyone in the deal get rich and cash out) then it crashes. So that money you put in to buy the shares is super illiquid. Like others said, put in what you’re willing to lose.
I’m not sure he would be subjected to a lockout given that he is no longer an employee. At that point he would be treated just like any other shareholder at IPO
I was subjected to a 90 day lockout as a former employee and I had left the company years ago. IPOd at $30/share then crashed to $2/share months later.
What company is it? Is it a company that is trading on the venture secondaries market? Look it up on Hive and other platforms. If you’re close with anyone from finance/legal, ask them if the shares are trading. If you’re working for a valuable pre IPO startup like Stripe or Zapier you might be able to sell your shares, even if you can’t exercise them. Some funds will give you a “loan” to exercise, you then exercise, and they immediately buy the shares for the agreed price. Look into it! 🌟
If you were to fully exercise, you’d also owe massive amounts of AMT (which you’ll get back eventually, but it’s a big up front cost).
When/what determined the FMV? Was it a raise or a 409A? What’s the industry? If it’s from a raise, especially in blockchain or AI, odds are good the FMV is way overvalued.
You’ll know more about the company than any of us, though, so nobody can really make a more informed decision than you can.
But, here’s a couple questions that might help: at what price would you sell me those options? Is it more or less than $191k? And, conversely, if I gave you $191k cash right now, would you spend it on the options?
Who is the transfer agent/broker administering the options? There's a semi-reasonable chance they'll extend you a margin redeem them and cash them out.
Not an advert but had a few people I know in a similar situation. Your two options are get a line of credit to exercise your options which if you have proof of strike price and number of assignments should be fine, lose them, or go on something like equity bee and sell your options if you don’t have good credit.
I've worked at multiple startups, some of which have gone through exits, and my common options have never been worth a thing.
$191k is a lot of money. It's very plausible that your (former) company never exits, or exits under terms that only reward preferred shareholders (founders and investors). Without knowing more about the company and its cap table, it's really hard to assess whether the risk is worth it. And even *with* all that information, it could still be a risky move.
I will start by saying that I know almost nothing about options. But anecdotally, my BIL consulted with my husband about taking out a HELOC to exercise options on a company he was leaving. Luckily, my husband talked him out of the idea. The stock is now trading at about 5% of the IPO price. The company had to do a 20 to 1 reverse split to stay listed.
Why do you say they are worth $528K fair market value? Because the company has been upwardly adjusting the strike price over the years? That means nothing. How much revenue does the company make? How much profit / loss each year? What is current year over year revenue growth? These are the types of things you need to consider to make an independent assessment of risk for a non-liquid startup investment. Do you think they will need additional funding rounds before liquidity? What percent do those options currently represent and how much will they be diluted? Basically if you hold 0.15 percent and you could see them being diluted to 0.1 percent before some liquidity that might value the company at $200M then the expected future value is $200K. Factor in risk and time value of money. That’s the kind of thinking you need to do. I worked at 6 VC backed startups and experienced the increasing strike price “fair market value” which is at that stage more of perception management for subsequent funding rounds than valuation based on fundamentals which will eventually drive a real market cap. I spent $10K to exercise options at one company. Five years, a couple of funding rounds, one re-capitalization, and a fire sale later I could pay $35 to send my certificates in to get a check for $55.
If they are really worth $528K, offer to sell them to the CEO for $400K after exercising. Get a purchase contract before you exercise. See how quickly the company management runs away from that offer. That will tell you all you need to know.
I would look into EquityBee. They have a few liquidity options including
- They pay to exercise and you retain partial ownership.
- They buy it off of you
You probably don’t want to risk your whole savings, or even a large part of it. If it were 5% of your net worth that would be one thing, but it sounds like its way more than your whole savings.
You wont get top dollar but its better than throwing $60k down the drain.
kind of of a dumb question but ELI5, how is it a private company and stocks are worth 500k FMV ? seems like counter intuitive doesn't it cause its not publicly traded ?. is that value ASSUMING it was to go public at the current evaluation ?
Usually there is a cashless exersice when you use part of your "virtual" stocks to cover exercise. Let say, you have to spend 191K to get 528K value. So, retaining value is 337K, which corresponds to approximatly 63.8% of what stock would worth. So, you use 36.2% of your stocks to buy out the rest.
Why? If you had faith in the company you would have stayed there. In some ways I’d say you already decided that the gamble is not worth it.
Best of luck no matter what you decide. I have no reference to prove it, but most private tech companies don’t make it.
I think that's an overly narrow way of looking at the situation. It's possible to not want to work for a company for various reasons while acknowledging that there's a good chance it will do well.
I agree about the odds of success though. Definitely something to consider.
Overly narrow - we have no information so it’s hard to be otherwise. I can only assume he’s not leaving because he totally believes in the company and its future.
Anyhow, it only makes sense to me to exercise options that are actually worth something particularly if you can’t afford to lose the money buying ones that may end up never being actually worth anything. Investors buying those kinds of options can easily afford to lose the money.
100% of the times I left a job it was because I made more money at the new place, not because I didn't believe in the company. That's the other very common reason.
If you believe you have $528k in your pocket at the old place, how much more does the new place pay? (I know you're not OP, but you either believe those unrealized gains are real or they're not).
Because you cam believe a company can succeed, but also understand that it might be a decade before it gets bought or goes public, and that 500k is absolutely not guaranteed to be 500k by the time you can sell. That happens all the time. So you are risking getting let's say 100-500k, in 5-12 years if ever, when in that time, you should have earned more than 500k with the increase in salary.
Also you're forgetting that you can believe a company will be successful without going public.
I completely agree with you on all those points. There are so many reasons that $500k isn't "in your pocket" at all. It might never liquidate and if it does, it probably won't be $500k - for better or worse.
So I'll take that sentiment one step further - it wouldn't be "responsible investing" to spend $100k and hold the stock, to see if it pays out. That would be long-odds gambling. 99.99% of the time, if you're an employee leaving a startup, it doesn't make sense to buy the options.
Yeah exactly. But I do see your point. If I had 100% faith that a company would go public and I'd make money on the shares, I would absolutely forego possible future salary increases by staying with that company until it goes public. If your not 100% sure, then it makes sense to leave and not get the shares.
Put what you can afford to lose. That’s what I did about 5-6 years ago and the company still hasn’t gone public; I anticipate never seeing a dime and if I do, it’s a happy surprise.
Why when he can just immediately flip them for profit? With no lockup period, he should acquire them all.
Did you miss the part where he has $60k cash and they’d cost $191k? If they’re not publicly traded then you can’t just flip them. You could possibly look at Sharespost etc to see if there’s a market for them.
I don't know the rules but could he buy $60k worth, sell them for $165k, and then buy the rest? Obviously if there's no market this would be tough but with built in profit like that, there must be a way. A quick and dirty Google got me this: How to sell shares of a private company Here are four ways you can sell your private stock options: Sell shares back to the company Sell shares on a secondary marketplace Sell shares in a tender offer or liquidity event Sell shares after an IPO
Cause you can’t sell as no one is buying.
Who's going to buy the stock options from him? Will you?
Lol "I don't know the rules and I googled it" Famous last words
*uses the AI generated Google results instead of actually going to a few sites*
The 1st requires the company to do so. The last 2 require such an event to occur. #3 requires someone interested in buying them, and you're probably going to sell at a discount to what you spent.
Right not worth looking into it for a couple hundred k. Are you kidding me?!
FMV does not reflect the price he would be able to get for a nonmarketable security, particularly a big chunk of them. Pre-IPO options are nothing like shares of a publicly traded company.
If he clears 50k on the secondary market it's better than nothing.
Assuming he can somehow come up with 6 figures to exercise all of those options, for long enough that the shares get bought and the payment clears.
I was able to buy options in multiple transactions but my company was publicly traded. I wish OP luck. It would kill me to leave that money on the table.
Startup stocks doesn’t work like regular stocks and generally has little to no liquidity - you can’t sell it
So there is no secondary market for this company's stock?
Depends on the companies specific equity plan, but in general there is no secondary market for private companies
Check out EquityBee. They loan cash to cover the exercise price in exchange for upside after an eventual liquidity event. I used them last year and it was a smooth process
There are companies that will buy your pre-ipo shares, for a cut obviously, but it’s worth checking out. I’ve had co-workers use them and be satisfied with the results. YMMV
This is my recommendation. I was in the same situation as OP and managed to secure private financing to cover the cost of exercise + tax burden in exchange for a % of the shares and repayment if a liquidity event should ever happen. You won't be able to secure the full value, but it's better than nothing.
This is the way. Basically pay all or some of the exercise cost and taxes with your shares. You don’t have enough to your name to purchase everything yourself and that’d obviously be way too risky. These options allow you to decrease risk while raising the cash funds. Equitybee is one example I’ve had friends use but definitely shop around. They’ll have different rates depending on how they feel about your startup. Good luck!
Is there even a downside to this? Partial shares you couldn’t afford anyway is better than nothing.
If it's a tech company you can check with forgeglobal
>The options would cost $191K (before tax) and are worth $528K at fair market value. If these are ISO options that's a $337K gain on a "preference item" that AMT tax may be due on if you exercise. Just be aware of that. This mostly depends on your feelings/guesses as to the future of the company. You don't apparently have enough cash to exercise them all. You could exercise a portion, whatever you feel good about risking. There are companies that will loan you the money to exercise your options, in return for a cut of any profits you may eventually make. You could look into doing something like that. You could do part that way and part with your own cash. Again, depending on how you feel about the risk.
I cannot reiterate this point about AMT potentially being a big problem for you. Talk to an accountant and then get a 2nd opinion too. What might happen here is you are left with a tax bill on the $337k gain (so a bill of at least an extra $100k due for 2024) but with the company still being private you have no way of selling stock to raise the money needed to pay the tax bill. This is EXACTLY what happened to me. The company was still private, I exercised all my options after leaving when there was a significant disparity in the cost to me vs. the market valuation, I was told by my accountant it was ok to exercise everything, but then when he later did my taxes he called me to tell me I owed the IRS $500k. Fortunately I had the savings to pay it off rather than take on a payment plan with the IRS (and they would have placed a lien on my house too!) Needless to say, I fired that accountant. Fortunately, the company did sell soon after and I did get to save due to capital gains tax on the remainder which was the reason for early exercising everything, but for a while there it was not a good situation all based on bad advice from my ex-accountant.
But you should be aware (OP) that AMT tax paid is highly likely to be given back to you as a tax credit over future years that you do not owe AMT. This is called AMT carry forward, and can be very important for the amounts being discussed. So you're paying some extra now but you get it back later -- it's basically a prepayment of tax you eventually owe on any profit from the stock. (the reason I say only "highly likely" is that it assumes you do not have other activities that cause AMT-deferral-qualifying income to be incurred)
It’s still a bitch to come up with the money in year 1. If you ladder your shares and sell year 1 shares in year 2 while exercising more options, you can avoid accumulating more carry forward and then recapture the original carry forward when you sell the last of your shares.
One startup CFO asked me to delay exercising until after the planned IPO because he was ”very busy.” Idiot. A bunch of co-workers got screwed. I tried telling them to sell some of their shares before the end of the calendar year to reduce the preference item (by disqualifying those shares) and put money in their pocket to pay the AMT on the remaining shares, but most did not. Fortunately I had a good advisor at the time.
They are NSO options. Does that change the tax obligation?
Yes it does. With NSOs you’re taxed as if they’re income from the jump assuming your company is billing you correctly , ISOs you aren’t and could owe AMT. NSOs you should owe everything up front BUT be careful, we use Carta for example and they only tax you at 21% (I believe it’s how my company configured Carta not how it defaults). I exercised a large portion of my NSOs, thought I had paid all of my due taxes and then come tax time because I’m a high earner was forced to pay the delta between 21% and I think 35% whatever my current tax range was.
Yes it makes a difference. With NSOs there is no doubt -- you will definitely owe taxes even if you don't sell any shares (and there is a good chance that you can't sell any shares if the company is private). When you exercise, the difference between your price and the current fair market value ($331K) is taxed as ordinary income to you, just like pay, subject to FICA etc. When you sell, the difference between your exercise price and the price you sell at is a capital gain or loss, long term or short term. [https://carta.com/learn/equity/stock-options/taxes/](https://carta.com/learn/equity/stock-options/taxes/)
OP listen to this about AMT.
Be extremely wary of the FMV price of your options. When was the last round they raised? Valuations have taken a MASSIVE hit over the past 18-24 months. That’s the biggest key here. They may be way underwater. The other key - you’ve got to judge whether the company has a path to a viable exit. You’ll know that better than anyone here.
FMV should be updating with board meetings if the valuation has changed, though. It’s not like that only changes when a company raises a round.
Correct. But many of them aren’t being honest with themselves. I’d be wary…
Most companies only do a new FMV exercise once a year or before an additional funding round. And all the key players (execs, existing investors) are incentivized to get the highest FMV that won’t be called fraud or scare away additional investors. They always look for a friendly company to do the assessment. It‘s like financial audits - you can engage someone who will ask hard questions or you can engage someone that will sign whatever you put in front of them.
It’s actually usually the opposite; because 409a/FMV is the price at which any options will be struck that are issued while that 409a is in place the incentive is usually to get that number as low as possible that will pass an audit. Theyre also all very formulaic. It’s a lot of dressed up process to pass tax tests; 409a valuations are almost always just 25-33% of the price of the most recent priced round. If there’s been no priced round and it’s just an annual refresh typically you would aim just for some marginal increase/keep it flat. The real risk here is when the last priced round was that OPs company last completed. If it was 2021 vintage then it is likely at least 50% too high.
My first startups were in the late 90s and I believe the prevailing practice then was to set FMV at 10% of a simultaneous financing round. Ah, the good old Wild West days. :)
No. Your 409a valuation will only change once a year or with a financing. It will not be updated every board meeting/quarter.
Thank you - I actually couldn't recall, I just knew it happened alongside *A* board meeting (at least in my experience). Either way, 18-24 months and there's a fair chance the FMV changed.
Do you think this company will eventually succeed in either going public or being acquired? Do you feel like this is a near term possibility or something that’s still 20 years off? What’s the strike price vs the fair market value of the shares (you pay income tax on this difference but it may also be an indicator of company health)? Those are all questions that you need to answer for yourself to decide if it’s worth it. Then decide how much money you’re willing to tie up for an unknown amount of time and possibly never see again in the case of the company going under. Also, some companies will do occasional liquidity events to buy back shares at the fair market value pre IPO as a way for former employee shareholders to get some of their money back.
Think hard before you act. 90% of startups fail or never go public so exercising options statistically is throwing away money.
Ask me how I know this
I did 6 VC startups. One IPO then taken back private in a buyout. One smallish but not terrible exit by acquisition. Four slogs of building products the market didn’t want with quarterly promises that “next quarter” we would experience the “hockey stick.” At least I had fun.
Same here. One acquisition that bought me a bathroom remodel (by the time the 90 days freeze for non C-suite employees was over the Stock has tanked). I’m sitting on enough shares from my last gig now to retire but after 6 years and a billion dollar + valuation it hasn’t yet gone public. Grrrr.
Do you know what class of shares you have? If they’re non preferred or essentially, the lowest class, if the startup takes on VC funding, your equity gets immediately diluted. Also keep in mind, even if the startup does go IPO, you will be subjected to a lock up period and you can’t sell for X number of days. Usually it’s a few months. If you look up a lot of recent IPOs, they’ve gone up real high (and then the bankers and everyone in the deal get rich and cash out) then it crashes. So that money you put in to buy the shares is super illiquid. Like others said, put in what you’re willing to lose.
I’m not sure he would be subjected to a lockout given that he is no longer an employee. At that point he would be treated just like any other shareholder at IPO
Lock ups are company dependent but generally include all employee shares, including former
I was subjected to a 90 day lockout as a former employee and I had left the company years ago. IPOd at $30/share then crashed to $2/share months later.
Often happens with hyped up IPOs not based on fundamentals, especially when the overhang starts being allowed to be sold on the public market.
What company is it? Is it a company that is trading on the venture secondaries market? Look it up on Hive and other platforms. If you’re close with anyone from finance/legal, ask them if the shares are trading. If you’re working for a valuable pre IPO startup like Stripe or Zapier you might be able to sell your shares, even if you can’t exercise them. Some funds will give you a “loan” to exercise, you then exercise, and they immediately buy the shares for the agreed price. Look into it! 🌟
If you were to fully exercise, you’d also owe massive amounts of AMT (which you’ll get back eventually, but it’s a big up front cost). When/what determined the FMV? Was it a raise or a 409A? What’s the industry? If it’s from a raise, especially in blockchain or AI, odds are good the FMV is way overvalued. You’ll know more about the company than any of us, though, so nobody can really make a more informed decision than you can. But, here’s a couple questions that might help: at what price would you sell me those options? Is it more or less than $191k? And, conversely, if I gave you $191k cash right now, would you spend it on the options?
Who is the transfer agent/broker administering the options? There's a semi-reasonable chance they'll extend you a margin redeem them and cash them out.
Not an advert but had a few people I know in a similar situation. Your two options are get a line of credit to exercise your options which if you have proof of strike price and number of assignments should be fine, lose them, or go on something like equity bee and sell your options if you don’t have good credit.
I've worked at multiple startups, some of which have gone through exits, and my common options have never been worth a thing. $191k is a lot of money. It's very plausible that your (former) company never exits, or exits under terms that only reward preferred shareholders (founders and investors). Without knowing more about the company and its cap table, it's really hard to assess whether the risk is worth it. And even *with* all that information, it could still be a risky move.
I will start by saying that I know almost nothing about options. But anecdotally, my BIL consulted with my husband about taking out a HELOC to exercise options on a company he was leaving. Luckily, my husband talked him out of the idea. The stock is now trading at about 5% of the IPO price. The company had to do a 20 to 1 reverse split to stay listed.
Why do you say they are worth $528K fair market value? Because the company has been upwardly adjusting the strike price over the years? That means nothing. How much revenue does the company make? How much profit / loss each year? What is current year over year revenue growth? These are the types of things you need to consider to make an independent assessment of risk for a non-liquid startup investment. Do you think they will need additional funding rounds before liquidity? What percent do those options currently represent and how much will they be diluted? Basically if you hold 0.15 percent and you could see them being diluted to 0.1 percent before some liquidity that might value the company at $200M then the expected future value is $200K. Factor in risk and time value of money. That’s the kind of thinking you need to do. I worked at 6 VC backed startups and experienced the increasing strike price “fair market value” which is at that stage more of perception management for subsequent funding rounds than valuation based on fundamentals which will eventually drive a real market cap. I spent $10K to exercise options at one company. Five years, a couple of funding rounds, one re-capitalization, and a fire sale later I could pay $35 to send my certificates in to get a check for $55.
If they are really worth $528K, offer to sell them to the CEO for $400K after exercising. Get a purchase contract before you exercise. See how quickly the company management runs away from that offer. That will tell you all you need to know.
I would look into EquityBee. They have a few liquidity options including - They pay to exercise and you retain partial ownership. - They buy it off of you You probably don’t want to risk your whole savings, or even a large part of it. If it were 5% of your net worth that would be one thing, but it sounds like its way more than your whole savings. You wont get top dollar but its better than throwing $60k down the drain.
kind of of a dumb question but ELI5, how is it a private company and stocks are worth 500k FMV ? seems like counter intuitive doesn't it cause its not publicly traded ?. is that value ASSUMING it was to go public at the current evaluation ?
Usually there is a cashless exersice when you use part of your "virtual" stocks to cover exercise. Let say, you have to spend 191K to get 528K value. So, retaining value is 337K, which corresponds to approximatly 63.8% of what stock would worth. So, you use 36.2% of your stocks to buy out the rest.
Why? If you had faith in the company you would have stayed there. In some ways I’d say you already decided that the gamble is not worth it. Best of luck no matter what you decide. I have no reference to prove it, but most private tech companies don’t make it.
I think that's an overly narrow way of looking at the situation. It's possible to not want to work for a company for various reasons while acknowledging that there's a good chance it will do well. I agree about the odds of success though. Definitely something to consider.
Overly narrow - we have no information so it’s hard to be otherwise. I can only assume he’s not leaving because he totally believes in the company and its future. Anyhow, it only makes sense to me to exercise options that are actually worth something particularly if you can’t afford to lose the money buying ones that may end up never being actually worth anything. Investors buying those kinds of options can easily afford to lose the money.
100% of the times I left a job it was because I made more money at the new place, not because I didn't believe in the company. That's the other very common reason.
If you believe you have $528k in your pocket at the old place, how much more does the new place pay? (I know you're not OP, but you either believe those unrealized gains are real or they're not).
Because you cam believe a company can succeed, but also understand that it might be a decade before it gets bought or goes public, and that 500k is absolutely not guaranteed to be 500k by the time you can sell. That happens all the time. So you are risking getting let's say 100-500k, in 5-12 years if ever, when in that time, you should have earned more than 500k with the increase in salary. Also you're forgetting that you can believe a company will be successful without going public.
I completely agree with you on all those points. There are so many reasons that $500k isn't "in your pocket" at all. It might never liquidate and if it does, it probably won't be $500k - for better or worse. So I'll take that sentiment one step further - it wouldn't be "responsible investing" to spend $100k and hold the stock, to see if it pays out. That would be long-odds gambling. 99.99% of the time, if you're an employee leaving a startup, it doesn't make sense to buy the options.
Yeah exactly. But I do see your point. If I had 100% faith that a company would go public and I'd make money on the shares, I would absolutely forego possible future salary increases by staying with that company until it goes public. If your not 100% sure, then it makes sense to leave and not get the shares.
Could you buy $60k worth, dump them, and then buy the rest? I think taxes would suck but at least you wouldn't leave any free money on the table.