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How I sold my stock options (segah.me)
102 points by hannaysteve on Feb 5, 2018 | hide | past | favorite | 45 comments

Couple of thoughts as a founder and investor:

1) The company is disincentivized to help you sell your stock/options because it will create a new valuation of common stock. Companies use the lure of a low 409a to attract employees, especially savvy executives, with equity packages. Doing anything to set a higher future strike price is not in their interest.

2) Your NDA almost certainly prohibits you from communicating anything meaningful about the financial success and any future roadmap to possible investors. The company isn't required to open their books to a potential new purchaser and the limited data you can get via Delaware company shareholder rights almost certainly can't be communicated either.

3) It is illegal to market your shares to non-accredited investors.

4) Remember you are selling common, investors are almost always buying preferred with liquidation preferences and other rights attached. The valuation you can ever achieve is limited pre-exit (where all shares usually achieve the same valuation).

Things you can do:

1) The best time to sell like this is during the next round of fundraising. If you are on good terms with the company and probably have already left the company, you may be able to tack on your common shares in a sidenote to one of the investors.

2) Approach existing shareholders (including the founders) as they are best placed to buy your shares. Remember though they probably have board material access and will have more informational rights and access than you do. They will try to price down the shares below their true value.

3) Some specialist secondary VC firms exist who will either buy shares or offer you a personal warrant on the shares. You probably need to be holding $1MM+ of equity for this to be worthwhile.

Overall: this is really a firesale approach. If the company is doing well, existing investors will buy at a huge discount and if the company is not doing well/unclear you almost certainly won't be able to sell.

It's almost certainly never worth trying to sell pre-exit.

This is why google/facebook/snapchat/airbnb etc. take the best talent. There is an opportunity for early stage companies to create equity packages that attract great people. It is really a shame.

> Overall: this is really a firesale approach...It’s almost certainly never worth trying to sell pre-exit

You advice was great up until this bit, at which point you are completely wrong.

The best time to sell shares is on an up round. There will be people who didn’t get in who want to. It’s perfectly common that they’re underallocated to a company that you’re overallocated. That’s not a fire sale it’s just a deal that make sense.

Can anyone advise on which documents would be worth requesting under Delaware company shareholder rights to help assess stock value?

> Some specialist secondary VC firms exist

Do you have any names or links?

Another one is http://www.secfi.com

You might start here :

- EB Exchange

- Emerson Equity

- ESO Fund

OP here. This is straight from the theory book. But from my experience there is a lot more gray area

Voting this up. I came here to opine something similar. My POV is similar to that of the parent (Founder and Investor).

Yep, strong +1 to the "sell at next round" and find a way to make it worth the while of the founders. They'll dictate what happens and it is, at best, a distraction for them, and at worst, a problem.

Ex: When a round is already oversubscribed yet they still want to do someone a favor, such as for a stronger advisory relationship, they may be willing to sell your common as part of the round on your behalf.

Generic “obvious wisdom” type of article rather then specific actionable steps.

Apologies, but it leaves reader with the main question unanswered - how?

There's a procedure in your restricted stock contract. Follow it.

Finding the investor to buy, and getting the company to go along are the harder tasks, and the OP covers those.

Luckily I don't have any right now that requires seeking of alternative venues.

Any restricted option holder however might benefit from insights and potentials that could of been provided by secondary marketplaces.

don't many option plans say that shares are non transferable until a liquidity event unless company decides they should be transferable (ala what uber did recently).

Yes. This is SOP for law firms authoring stock option agreements after Facebook IPO'd.

OP is extraordinarily lucky that his company allowed a stock transfer, with extraordinary being too weak of a word to describe his circumstance.

Are they actually non transferable or are they required to give the right of first refusal to the company? If they are non transferable at all, what limitations are there? Can you transfer them in bankruptcy or divorce?

Probate transactions allow for a transfer typically (and they may allow for a very few specific other cases such as covering tax on your options by offering a buyback for some portion of them), but otherwise, there is absolutely no transfer allowed unless the company's board allows it.

One time transfer into a family trust is usually permitted as well.

It is possible to use a specialized finance vehicle in order to create a synthetic liquidity event for non-transferable exercised options; it is, in effect, a non-recourse promissory note.

Just when I thought I was getting the hang of how equity works... I didn't understand a word of that (other than non-transferable exercised options).

Apologies, I overcomplicated it.

Someone lends you money to exercise your options, you pay them back (at IPO or acquisition) as well as additional compensation for their risk of your shares being worthless.

> Someone lends you money to exercise your options, you pay them back (at IPO or acquisition)

There is a lot of uncertainty about whether these loan-and-pretend or forward structures violate the spirit of one’s stock option contract, which can and has resulted in forfeiture, and if it involves creating an off-exchange securities swap, illegal since Dodd Frank for non-qualified participants. It was receiving regulatory attention before cryptos distracted everyone. (One firm even got jammed by the SEC early on for structuring illegal swaps.)

How would that invalidate the option contract? As far as the company is aware the option was exercised under the employee name and stays that way indefinitely till an IPO event.

Post-IPO the shares are prob deposited in Computershare and as a shareholder you can transfer it to anyone you want.

Yup that is what equidate does. Basically a forward contract on the underlying shares. I have done this with some AirBnB shares.

How was the experience overall?

Overall was pretty easy and painless. In general I pretty feel good about it as they mention that the underlying principle is backed by insurance so if the counterparty does not transfer shares over you can get your principal back in theory.

Yes, there are several strategies. Each of them impacts significant discount on sale price, requirements to make a sale, or significant risk to option holder.

Kind of like saying "anyone can buy a car without having a job or savings" — it's true, but those deals aren't comparable to those that can buy a car with cash.

There are funds/financial firms that will fund your options exercise, and take nothing if your common shares go to zero (they take a cut if there is an IPO or other significant liquidity event). Its an equity-backed loan with no recourse.

Appears to be a reasonable option if you have a large amount of options and prefer the cash now vs later.

> All of these deals require approval by the company. Which means you don't get to choose the firm, you get to deal with the firm they approve of.

EDIT: These transactions require no agreement from your company in order to execute.

I … oof. I'm sure this stuff does look good from the outside. From experience, it is not anything close to that.

Most stock options have short expirations (10 year is still very uncommon). There is no "now vs. later" choice, it's a "now or never choice"

All of these deals require approval by the company. Which means you don't get to choose the firm, you get to deal with the firm they approve of.

That kind of deal is in the 1% of deals they make. Almost all require option holders either repay loans or take on significant risk.

I know this stuff sounds great on paper, in practice it is another world. Not to mention the absurdity of giving away half or more of your gains to a private equity firm from options you earned, just because the company has made a weird rule.

Typically these transactions are practiced on exercised options (i.e., shares) not options. I've never seen that offer for options.

And they're right, it is fairly risk free. The investors understand (and sign a lot of paperwork indicating that) they understand it's extremely high risk and will possibly end up that (a) the shares will be worth nothing or (b) the company may never, ever offer a liquidity event. In the event that they do, the shares or derived value thereof transfer to the lender/investor. In the event that they don't, the instrument performs exactly like a loan/promissory note backed by the equity the shareholder owns with no vehicle for enforcing repayment beyond derived value from the shares.

Virtually all of them do. An example of why they do this is craigslist, which did not disallow this and an early employee sold their stake to ebay, which caused craigslist much consternation.

Though I'm not sure what's stopping you from just making up a contract that says I agree to sell you X shares for price $Y in the event that they become publicly transferrable and then selling that contract.

I think options agreements usually contain language that say you're not allowed to do that, so maybe the risk is if you were to get caught doing that they could cancel all your options.

This was my first reaction. I don’t see why a company would allow this, it could easily put them in a tight spot if they were trying to raise capital at the same time.

Perhaps a company would allow it because the labor market coordinated amongst itself and demanded it? But alas you're correct capital can fuck labor over and over again with no recourse in the current climate.

Maybe I missed it but there doesn't seem to be much info on the selling price. Did it sell on the valuation implied by the last funding round or was it lower to "solve the risk problem for the investors?".

Usually the common stocks goes at a discount of around close to 15-20percent when compared to preferred for good deals. If the company is not doing well, the discount would be higher proportionally.

My experience is that common can be one-third of preferred. I'm sure that spread varies, but it's wider than you're describing.

Out of pure curiosity, what perspective would give one this experience? I guessing working at a VC fund?

Founding and working for multiple startups, including some that were fairly successful and therefore attracted multiple rounds of funding. I can't claim to have as much data as a VC would have, but I certainly have seen wider spreads personally, so I can attest that they exist.

Got it. Thanks for sharing!

I wish there were a better clearing house for this sort of collective experience. I guess HN serves that purpose, to an extent, but it's hardly organized.

What about those places like EquityZen, anybody done that?

Having just read about Equity Zen following your comment, I'd also be interested to know what people think about them. Their FAQ lays out a pretty compelling case for their value prop to all parties, so I'm curious if there are any strong arguments against them, especially from a company's perspective.

I can put my spin as a buyer on it. Overall it's pretty good although fee are high. The other thing is they do specialize in forward contracts which kinda suck but only option to buy shares of companies that do not allow transfer right now.

I have done two transactions with them. One was a SPV direct transfer on the companies cap table which was pretty straight forward. The other one was a forward contract which was a little more unease but the opp was worth it.

Seems to be some conflation of the concept of equity and options on equity in the article?

Were you able to sell your options, or exercise them and sell those shares ? If the latter, can you give us a hint how the price compared to the last round your company raised ?

What did you mean by "changing the attractiveness of the shares" ?

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