
Ask HN: I am considering leaving my start-up. Should I exercise my options? - anonymous_u
I am an employee at a privately-controlled start-up. The company has a bright future, but I have been thinking of leaving to pursue other opportunities. I was an early hire, and have been granted options which, after a few rounds of investment and dilution, amount to a few percentage points of the company. The majority of my options have vested, and I could exercise them for an amount in the low five figures.<p>The company is aiming for an acquisition of at least $100M (and will possibly get much more), and I am optimistic about its chances of achieving that goal in a few years. Thus I feel that my options are potentially very valuable.<p>Questions:<p>1) Is it sensible to exercise my options now in this scenario?<p>2) It is possible that the company will take another round of investment prior to any acquisition. Should I fear that when I'm not around anymore, and the company has no incentive to treat me well, that my ownership will be substantially diluted? Can my future dilution be estimated or protected against?<p>3) Are there other ways to proceed? For example, should I attempt to get bought out now, somehow?<p>4) What other questions should I be asking?<p>If I decide to go down this road, I will seek professional advice, but I thought I would begin by consulting the smart people here on Hacker News.
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tptacek
Tough call. Let me tell you two stories.

Story one: a friend of mine worked at a startup that lasted ~5 years. He left
in year four and exercised his (substantial) options. The company was, as I
understood it, pro-forma cash flow positive, in a bright industry. And indeed,
just over a year later, they were acquired for many tens of millions of
dollars.

Unfortunately, they weren't acquired for enough money to sufficiently offset
VC liquidation preferences. To mitigate this problem, the company and its
acquirer created an incentive pool to create a fairly decent "earnout-style"
return for existing employees. Former employees holding common stock? Zilch.

Story two occurs right around the time I heard story one. A guy joins a
startup, sticks around for just shy of four years, leaves with a nice chunk of
unexercised options to start another company. "Buy private company common
stock and wind up like person one? Never!" Besides, person two needed the
money for the new company.

Fast forward five years, and company two is acquired at a... non-negligible...
price per share. Person two is out a fairly big chunk of cash. Person two's
old boss makes douchey comment on IM! Person two is sad.

Well, for a few seconds; then he's happy his friends did well. He also
rationalizes:

* The investment at the time was anything but risk-free, even if the company was acquired.

* It's not like the money didn't get invested; it just got invested in a company that hasn't 10x'd the investment yet.

* The money that would have gone into exercising the options would have been locked up for five years.

Before I bought private company common stock, I'd want to know everything
about:

* The number of outstanding shares and as much as possible about the terms the current investors have. What preferences do the VC's have? "We're shooting for 100MM" might be code for "We make fuck all unless we hit 100MM" --- and note that not many companies can pay 100MM for other companies.

* The likelihood of future investment rounds in the company, which will have deliterious effects on the value of your shares.

* How stable and reliable the management team is. Is the current CEO new? Is the company making its numbers?

If it's not "real money", _and_ iff you can't put the same money to good use
in your new venture, I'd go ahead and exercise.

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aquark
The kicker here is usually the tax liability depending on your jurisdiction.

Would you be looking at a large tax bill in addition to the cost of the
options? If you have to pay taxes based on the current valuation of the
company even if you can't sell the shares then exercising becomes that much
higher risk.

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beagle3
This.

The US tax laws in this respect are retarded; you have to pay taxes at the
moment you exercise your options, regardless of whether you can resell them or
not. In the previous bubble, it happened that people exercised options that
made them tax liable for e.g. $1M (because e.g. an IPO made it worth $5M), but
had a lockup of 6-months, which is quite common, and at the end of the lockup
period, their stocks were worth less than $1M.

In some other countries, you only pay taxes when you actually see money. That
makes a lot more sense.

And, Israel is now considering a new tax law which says an investment into a
"startup" (whatever that means) is immediately considered a capital loss.
Then, if it makes money, you have capital gain. for large-capital-base angels,
it makes cash flow simpler, -- and in fact, if they elect to use it, they'll
pay more taxes on their successes at the end. for small-time angels making one
or two investments a year, it is a huge difference in cashflow. for the state,
it doesn't matter in the long run, because it just gets the capital lost
written down sooner than later.

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cmars232
Here's another way to think about it: if you had a pile of cash in the low
five figures, would you re-invest it to speculate on that $100M acquisition?
Or would you take it and pursue other opportunities?

If the tax implications are ok, can you borrow funds to cover the discounted
stock purchase price, sell the stock, pay back the cost basis, keep the
profits and don't look back?

~~~
jellicle
It's a privately owned company. The stock is worthless. He can't buy it and
then flip it on the open market because there is no market.

~~~
cmars232
Could he could sell them to another shareholder?

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jellicle
As others are pointing out, options and stock in private companies are, as a
rule, worthless. (Unless you're the majority shareholder, and often even
then.)

The only protection you have against having your shares be made worthless is
that the company wants your ongoing goodwill, because you're a current
employee in an acquisition. If you're an ex-employee, you've got no leverage
whatsoever.

Suppose you owned 90% of a private company, and an ex-employee who resigned a
few years prior owned 10%. You have an acquisition offer. Would YOU structure
the deal so that the ex-employee got his 10%? Or would you structure the deal
so that he got nothing and you got it all? There's no legal penalty for
following either option. I think most of you reading this would invent some
sort of rationale for screwing the ex-employee (he didn't stick around when we
needed him, he didn't pull his weight, he doesn't deserve this payoff that I
worked so hard for...), and would then proceed to do so.

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maxawaytoolong
_Unfortunately, they weren't acquired for enough money to sufficiently offset
VC liquidation preferences. To mitigate this problem, the company and its
acquirer created an incentive pool to create a fairly decent "earnout-style"
return for existing employees. Former employees holding common stock? Zilch._

This happened to me at the first startup I worked at. I lost $18K, which was
about half the money I had at the time.

I don't know what to tell you. My other companies had reverse vesting... but
those ended up being worthless as well.

My new rule of thumb is to not spend more than 5% of my cash reserves on an
options exercise. (I have a lot more cash now, so this could still be a
significant exercise)

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NonEUCitizen
There's also a non-binary approach -- exercise _some_ of your options (i.e.
not 0%, not 100%). Figure out how much money (e.g. $100, $1000, $2500,
$10000?) you're comfortable losing entirely should the stock become worthless,
and what percentage of your vested options that allows you to exercise, and
use that as a starting figure. Then adjust that based on how much more risk
you are willing to take because you really think the company will succeed.

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staunch
Has the company already received multiple serious acquisition offers and
turned them down? Or at least some very serious interest from big companies?
That's often the case with companies that end up selling for >$100M.

If that is the case then it's easy: do it. If they haven't then perhaps you
should exercise half them as a hedge against kicking yourself later.

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nolite
you should sell them.... to me

