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if you are optimizing for regret minimization I'd probably argue that it's way less regrettable to end up in $200-300k in debt due to a crazy, unexpected snafu occurring (like an economic crash or company crash) than have to know for the rest of your life you could have been a millionaire if you just had bet on the (at the time) reasonably high probability event of eventual liquidity, by exercising options that you worked hard to earn. especially because in the crash scenario, you are surrounded by commiserating peers who also got burned, but in the upside scenario you missed out on, all of your peers except you are living the high life shaking their heads at your "foolish" (in hindsight) risk aversion.

edit: not sure why the downvotes. if you are interested in a treatment of peer-based utility functions that affect risk premia, see https://www.amazon.com/Missing-Risk-Premium-Volatility-Inves... -- in other words, risk may not be best measured as volatility but instead as the expected relative wealth gain/loss to your market peers. for private employee equity, those peers are other optionholders.

Well, a "company crash" is not a wild, unexpected snafu for a startup. It depends on the "facts," such as you know them, of course. But a $200-$300K debt is, bankruptcy option notwithstanding, a major life-altering event if you don't hit your payday. If it's a legitimately high probability payout, it may be a justified risk. But, for most people in that scenario, my guess is that they're wildly overestimating the upside potential.

I was following you for a while...but can you explain how this is different than taking out a home equity loan, going $200-300k in debt, and buying lotto tickets for a chance to become a millionare? Aside from the fact that you wouldn't know whether you would or would not have won that lotto.

The chance of winning the lotto is much much smaller than the chance of Uber surviving to an IPO with value at/above the fair market value that triggered $300k in AMT.

Yep I was referring specifically to the idea of Uber options converting to stock worth some reasonable price. The idea of Uber completely imploding to $0 seems rather far fetched, but it depends on strike price, etc.

There have been cases of lotteries where the expected value of a ticket, though low, was still sometimes positive. And there have absolutely been cases of people who figured that out and organized investors to buy large quantities of tickets for the return.

Plus, in the event you have $300k of debt and no assets, you can file for bankruptcy.

Isn’t this how we ended up with people like Donald Trump? Risky behavior pawned off on everyone else?

In this case, the bank that gives you a loan is the one taking the risk. Theoretically. The trouble is that the government doesn't like to let banks fail.

Trump is special. The fact that Deutsche Bank was still willing to lend so much, despite his repeated bankruptcies is very interesting. If I recall correctly, he was involved in a lawsuit with one department at Deutsche over missed payments while a different department was signing over $700 million.

its not really moral, but its incentived behavior

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