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What should you do with stock options during a recession?

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Re: What should you do with stock options during a recession?

#91

Post by benmanns »

JumpCrisscross wrote: post #86
benmanns wrote: post #80

Earlier quoted context omitted.

It works out in the event that the shares end up worthless.

> works out in the event that the shares end up worthless Then you're at parity with never exercising.

Yes, but you get the benefit of .7x exercising with the cost of never exercising.

Exercise, no successful IPO: lose $x exercise cost

Exercise, successful IPO: lose $x exercise cost, gain $y share sale benefit

No exercise, no successful IPO: gain/lose nothing

No exercise, successful IPO: gain/lose nothing

Service exercise, no successful IPO: lose nothing, maybe gain some AMT credits or capital loss carryovers

Service exercise, successful IPO: lose $x exercise cost plus interest, gain 0.7*$y share sale benefit

Your best best case is exercising yourself and getting the IPO, but you have to weigh that against the likelihood of it occurring and your personal risk tolerance for the $x cost to exercise.

I would never buy a lottery ticket, but I will always accept even .01% of a free lottery ticket.

Re: What should you do with stock options during a recession?

#92

Post by _carbyau_ »

xdennis wrote: post #37
swagasaurus-rex wrote: post #13

Earlier quoted context omitted.

Thank god?

For which part?

For a lot of people, both!

There are lots of people with zero shares and a simple dream to own their home. This is looking hopeful for many.

Re: What should you do with stock options during a recession?

#93

Post by lumost »

sbierwagen wrote: post #77
lumost wrote: post #62

Earlier quoted context omitted.

I only had options at one firm which was Series D and had ~300 employees. The company issued them at a price which was rich, then steadily issued new options at lower price points. The management made it a practice to have periodic calls which would talk about how they were 12-18 months away from IPO and the price target was going to be ~5x the rich price. Then there would be talks where engineering management would…

As you say when you mention liquidation preferences, I wouldn't be surprised if a PE buyout of a distressed company zeroed out employee equity.

Yeah, it’s tough to say. Company wasn’t distressed, but it “only” 2x’d over 8+ years. Pretty much a classic flat/no growth situation with modest profitability.

Re: What should you do with stock options during a recession?

#94

Post by seoaeu »

Retric wrote: post #54
andsoitis wrote: post #51

Earlier quoted context omitted.

> so holding cash at 0% return is still better than negative returns from stocks holding stocks as they go down in price does not necessarily matter. It only matters at time of sale. Selling an index (or a particular stock or set of stocks) as they go down only to buy them again later is not the right strategy... you're incurring transaction costs at the very least and the fact that you cannot time the market means y…

If you can sell 100 shares today and use that money to buy buy 200 shares in 6 months then you are better off than if you had held 100 shares for that same six months as long as you buy back into the market. Actually trying to time the market is largely a fools game, but people do get lucky. Or more often realize they shouldn’t try and time the market.

Yeah, except in six months you’d be thinking of waiting until you could buy 300 shares, and might miss the buying window entirely

Re: What should you do with stock options during a recession?

#95

Post by dnissley »

_carbyau_ wrote: post #92
xdennis wrote: post #37

Earlier quoted context omitted.

For which part?

For a lot of people, both! There are lots of people with zero shares and a simple dream to own their home. This is looking hopeful for many.

This is zero sum thinking -- however many people this helps, it will take just that many getting hurt in order for it to happen. Doesn't solve the root of the problem in the least, it's just a wealth transfer.

Re: What should you do with stock options during a recession?

#96

Post by redshirtrob »

This is a fine article. It covers a lot of the decisions one must consider when considering stock options. I just think it's a little abstract for folks who haven't lived the experience.

I actually tried to enumerate the scenarios. When I hit five variables I realized the advice would be mostly worthless. That's 32 separate outcomes, some of which are pretty subjective, e.g. do I think this is a viable company?

Nevertheless, I've been down this road a few times. I have some wins and losses. I think this article misses an important point: Exercising is not an all or nothing proposition.

For example: If I join a startup and leave after a year, the difference between my strike price and the 409a price might be non-zero. I can still exercise a percentage of my options to avoid AMT. Maybe I can't exercise all of them without triggering AMT, but chances are I can exercise a fair amount.

If I'm offered an early exercise, I don't have to do 100%. I can do a number that fits my budget. I just have to make sure I file my 83b election form.

Re: What should you do with stock options during a recession?

#97

Post by psanford »

fortran77 wrote: post #63
nrmitchi wrote: post #57

Earlier quoted context omitted.

> The worst outcome is I make no money; the best is that I keep 70% of my shares without paying for them. They even pay AMT. I'm not 100% sure about this, but IIRC these programs are typically structured as a tax-free loan to you. If the shares end up worthless, the loan is then forgiven. So while you may not be out the principle of the loan, or the AMT, the forgiven loan may be taxed as income at some point in the f…

No. The worst outcome is you make no money AND you have to pay AMT on gains you never were able to realize.

You can claim the AMT credit in the future tax years.

Re: What should you do with stock options during a recession?

#98

Post by Spooky23 »

pishpash wrote: post #44
neilfrndes wrote: post #10

Earlier quoted context omitted.

I recommend reading 'The Intelligent Investor'. The book describes strategies that help you navigate all kinds of markets. https://en.m.wikipedia.org/wiki/The_Intelligent_Investor . As counterintuitive as it seems, the book actually recommends buying stocks in a bear market since they are priced reasonably. Warren Buffet's famous quote comes to mind: “Be fearful when others are greedy, and greedy when others are fear…

I don't know, people seem pretty greedy still. VIX barely at 30, PE10 near pre-pandemic highs, real yields negative out to 3-4 years, and markets are orderly. If you get weeks and weeks of 4% daily drops, real yields at 5%, and hedge funds being force liquidated like 2008, then you know real fear. Look at how far behind the Fed has gotten: https://www.longtermtrends.net/real-interest-rate/

Typically the shit hits the fan in the fall. You’ll have a crash/correction than a deeper one. That’s when you buy.

Personally, I went mostly cash and TIPS last year. You should too.

Re: What should you do with stock options during a recession?

#99

Post by _carbyau_ »

dnissley wrote: post #95
_carbyau_ wrote: post #92

Earlier quoted context omitted.

For a lot of people, both! There are lots of people with zero shares and a simple dream to own their home. This is looking hopeful for many.

This is zero sum thinking -- however many people this helps, it will take just that many getting hurt in order for it to happen. Doesn't solve the root of the problem in the least, it's just a wealth transfer.

Yup. But how many of the people who might be able to afford a home if it comes down 20% will care about the others.

This is what a market does. Risks are taken and the result is that some will lose out. People are not guaranteed profits. Until you are a corporation with enough influence in government it seems...

Re: What should you do with stock options during a recession?

#100

Post by jamiequint »

benmanns wrote: post #80
JumpCrisscross wrote: post #31

Earlier quoted context omitted.

> worst outcome is I make no money; the best is that I keep 70% of my shares without paying for them. They even pay AMT I don’t have the details to be able to say anything useful. But there might be a narrow window of tax circumstances in which 70% of the equity without AMT but with loan costs is better than 100% with AMT + marginal long-term taxes and no loan costs. (Such schemes make sense if you’re concerned about…

It works out in the event that the shares end up worthless.

In this case you would likely owe income tax on the amount EquityBee lent you to exercise the options. Non-recourse loans that are forgiven are considered income by the IRS.
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