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Even when the maths is simple, few people seem to do the maths. The number of reasonably bright friends I have who say "I've got some equity, so if it goes big I'll make great money", but haven't actually sat down and calculated that "great money" is a one-off £50k astounds me.
You don't have to hold the stock until IPO. If the company is doing good, finding a private buyer through a stock broker shouldn't be that hard. Sure, you won't get the best deal, but it lets you cash out. Also, if a private company grants you options and never gives you any options for liquidity (like buying the stock back when taking new investment etc) you should be really careful about overvaluing the options. Cl…
Have you found a private buyer for stock? What was the experience like?
I have a single peeve with this otherwise excellent article: "My after-tax salary is less than $100,000 USD/year, so by definition it is impossible for me to exercise my options without borrowing money." This fact isn't true "by definition". It's true "by arithmetic". We say a fact is true "by definition" if it isn't true for any other reason. [1] [1]: http://lesswrong.com/lw/nz/arguing_by_definition/
I'm really interested in other people's experiences with understanding how their stock options work. It seems really easy to misunderstand something serious, even if you know quite a lot about equity.
I got an offer from a late-stage (not sure if that's the right term, but they had a shipping product) non-public startup that included 10,000 stock options. That sounded like a lot, but I had problems evaluating that number without knowing the shares outstanding. I asked for that figure, and was told it was privileged and confidential. I decided to value the options at $0, and instead think of them like a non-monetar…
So yes, options are somewhat of a lottery ticket with ever changing odds. If the company does extraordinarily well, you will do well also. If you truly believe the company has a very good chance at financial success, you should stay irrespective of the number of options. If you are making a significant contribution to that success, a rational company will want to reward you and incent you to stay with more options. If both those things are not true, it is best to seek your fortune elsewhere.
Why is it so hard to convert these to cash the same instant you exercise them? If there are some special terms attached to your share of the company that prevent you selling the shares directly, you could just make a (transferrable) derivatives contract with interested investor(s) where you pay them the dividends from the stock?
I'm really interested in other people's experiences with understanding how their stock options work. It seems really easy to misunderstand something serious, even if you know quite a lot about equity.
I got an offer from a late-stage (not sure if that's the right term, but they had a shipping product) non-public startup that included 10,000 stock options. That sounded like a lot, but I had problems evaluating that number without knowing the shares outstanding. I asked for that figure, and was told it was privileged and confidential. I decided to value the options at $0, and instead think of them like a non-monetar…
1. TRANSFERABILITY. If you are given options to buy privately-held common stock in lieu of compensation, you must demand transferability. Rights of first refusal (ROFRs) are fine. "Board approval" is not. "Board approval" means "you may not sell your shares until we go public, except to us, if and when we feel like it, and at a price we get to unilaterally decide".
2. CASHLESS EXERCISABILITY. Always ask for cashless exercisability. In the public market, if you ask your broker to "cashlessly exercise" in-the-money options, here is what happens. First, your broker lends you the money to exercise the options. Then, the broker sells some of the resulting stock. Finally, the broker pays herself back, plus a pre-disclosed fee, and returns the rest to you.
This also works with private stock. (Unless you forgot Rule No. 1; if your shares aren't transferable you've already been screwed.) But you may not require a broker. Some companies allow for direct cashless exercise. Suppose you hold options for 100 shares struck at $100 per share. You need $10,000 to exercise. The company figures its stock's "fair market value" is $110. You check with outside sources, e.g. a private-stock broker, and conclude this is not much less than what you could sell your stock for in the market. Your stock is worth $11,000 to the company; it is $1,000 in the money. After cashlessly exercising with the company you would get $1,000 of stock, i.e. 9 shares. (Fractions of shares are usually lopped off in these calculations.)
Plus: you got shares without putting up capital. Minus: you lost the upside (and downside) on ninety-one shares. That said, 9 shares is better than 0 because you had no capital to exercise upon termination.