Ask HN: buying options in a privately-held company

I work at a privately-held, reasonably successful health tech company. An early employee, who recently left, called me with a proposal. He has more vested shares than he can afford to buy, and they expire in two weeks. He wanted to come up with a way for someone left at the company to buy these shares _with_ him. To simplify matters, let's say the options are priced at one dollar and that he has 10,000 options. Let's assume I am interested in part but not all of the deal, and can get others to fill the gap. My questions are:

a) what kind of contract would I create to set up this deal (he would hold the shares in his name, I presume) b) what kinds of questions should I ask the CFO in order to come up with a fair 'meta-market' price.

Assuming the options are worth more than a dollar, I presume that a pool of people would come up with $10,000, and each person would get a proportionate quantity of options, and the ex-employee would get a quantity "for free". Does anyone have any insight into how I might do this and how the deal can be contractually structured, without getting too complicated?

The main issue here is: does the company allow the early employee to sell shares from an executed option when there is no public market for the shares. Most companies don't allow these shares to be sold (or have right of first refusal on a sale), so in this case the early employee would have to hold the shares.

If you are going to approach the CFO and let him know what you are thinking, this is the main issue to bring up. If the company will allow the early employee to sell the shares, than I would structure the $10,000 as a short term loan with tangible property as collateral (such as his car). The loan can either be paid back in 30 days or a set number of shares can be delivered at a set price. The $10,000 would be subtracted from YOUR_PRICE * SHARES_SOLD when the shares are delivered. You would write a check to the early employee for the difference. If no cash or shares are delivered you would get title to the car.

If a liquidity event is required to sell the shares to a third party, you could simply extend the loan period long enough for a liquidly event to emerge. This is more risky as the time frame is unknown, and would bring in concepts such as interest on the $10,000, etc.

The CFO should know the share price the board set at the last meeting. These prices tend to be low, but in general I think you should pay less than this amount for the shares. A discount of 50% is not unreasonable.

The other issue is taxes. The early employee will be incurring taxes at exercise on non-qualified options and at sale on incentive options, so in either case this needs to be factored in. The early employee will pay ( BOARD_SET_PRICE – EXERCISE_PRICE ) * NUMBER_OF_SHARES * MARGINAL_TAX_RATE for NQO at exercise and (YOUR_PRICE - EXERCISE_PRICE) * NUMBER_OF_SHARES * MARGINAL_TAX_RATE for ISO when he sells them to you. As long as the tax amount is greater than (YOUR_PRICE – EXERCISE_PRICE) * SHARES_SOLD he will be covered. His profit would be the shares he retains from the deal.

Good luck.

See other advice above, ie: it's very unlikely that you can actually execute this arrangement.

Supposing that you can, however, I would recommend that you either purchase shares outright, or now. Stock is not really a good thing to have joint ownership of (excepting cases of spouses, etc.).

I would never "purchase" (I'm using the term loosely here) stock that I didn't have ultimate control over. If the ex-employee wants to make some money, you could agree to purchase his options at a price between their current value and his strike price.

If you don't follow the above, you'd need a fairly rigid contract outlining how and when either party could force the sale of the stock (price, criteria, RFR, etc.).

If it's a great deal, and the option-holder's only problem is liquidity, loan him the money at an interest rate that's attractive to you and should be easy for him to pay if the shares ever have the expected value. Make the principal and interest due if the shares are ever sold (or when dividends are paid).