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> These 15,000, or 0.0833% of the company, were available to him at $0.27/share, or $4,050 total. So he had the opportunity to buy 0.0833% of the company at a $
by nandemo 10y ago
> These 15,000, or 0.0833% of the company, were available to him at $0.27/share, or $4,050 total. So he had the opportunity to buy 0.0833% of the company at a $4.8MM valuation. Given that they recently raised $20MM at an undefined valuation it really says something that he chose not to exercise the options.
I normally don't comment on HN without having read TFA, but this one is way too long and I just skimmed over it. I think OP not exercising their options is more about getting feelings in the way of a financial decision. A 4.8MM valuation is really cheap. And it's not like exercising would incur a huge amount of taxes.
- hkmurakami 10y agoA $20MM raise suggests a $100M valuation or so. That's a 20x increase in the stock price. OP's outlay would be something like $4000 + $35000 (state tax + short term capital gains. Less depending on how he hits AMT.). I don't think that's trivial, even if I'm off by a factor of 2.
- owenversteeg 10y agoDon't some banks let you take out a loan for the amount of the capital gains taxes using the shares as collateral? I'm not sure but I could've sworn I heard about this.
- jkmcf 10y agoFor public companies, I know it's true. I'm not sure about private companies.
- sjg007 10y agoIt's basically impossible with a private company.
- majormajor 10y agoIf you never get a chance to sell that stock at a high enough price to cover that 35K loan, are you still personally liable for it?
- Rylinks 10y agoGenerally if a loan is collateralized, you are not liable for it beyond the collateral.
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- bdonlan 10y agoIt's called margin, and you can only margin (use as collateral) shares that are liquid - i.e. publicly traded.
- owenversteeg 10y agoI know what margin is, and it's definitely possible to collateralize a loan with private shares. If you had options for 0.1% of Facebook before the IPO I guarantee somebody would write you a loan. The question I was asking was: does any lender do this as a matter of policy as opposed to one-offs? The answer appears to be yes - Silicon Valley Bank appears to have let customers collateralize loans with private shares.
- jdmichal 10y agoYes, but before they're liquid they're close to worthless. A bank can't pay their bill with collateral that they can't liquidate after they repossess it. If the company is already scheduled to IPO, that huge risk mostly disappears, so of course someone would write that loan. As for Silicon Valley Bank... They're serving the needs of the individuals around them. It's definitely not a common thing, and you're probably not getting anything close to a car or mortgage interest rate. (But still probably better than an unsecured loan.) From their own copy: [0] > Our tailored lending solutions can help you unlock the value of your private assets and simplify your financial life—in a way many traditional banks can't or won't. [0] https://www.svb.com/private-equity-venture-capital/private-banking-wealth-advisory/ https://www.svb.com/private-equity-venture-capital/private-b...
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- pfarnsworth 10y agoIt's the 409A valuation, not the funding amount, that matters. 409A value is usually much much less than the funding round.
- hkmurakami 10y agoThat'll apply to the strike price as well as the current "valutation", so the multiple factor between the two valuations should be around the same regardless (a strike price of a non trivial number like $0.27 suggests that a 409a valuation was already in place to price the options)
- pjschlic 10y agoThe original 4.8M valuation (which is his strike price - extrapolating from his share price and ownership %) has now increased to ~40M (extrapolated from 20M raise, estimating ~100M preferred shares valuation and 40% of that for 409A valuation[1]). This means 4k outlay for initial stock, but they are now valued at ~33.2k, incurring some short term capital gains of ~5.6k. This still seems like a steal, as is the value dropped on that valuation of 33k I think it can be recognized as a loss to offset other earnings, so generally I don't think the tax is that bad a deal (if the person has the cash on hand). [1] 41% is average ratio from here: https://www.capshare.com/blog/409a-valuation-guide/ https://www.capshare.com/blog/409a-valuation-guide/
- hkmurakami 10y agoThx for the analysis. Fwiw capital loss can only be applied to offset capital gains, other than 3k/year.
- syntheticcdo 10y agoCapital losses also carry forward for your entire life. Either 3k a year of offset ordinary income until you die, offset any future capital gains, or have written off your entire loss.
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- metaphorm 10y agoI think you're on the mark here. the capital gains tax liability from buying those shares would be significant, and possibly unaffordable since the shares are not liquid at the moment.
- rsanek 10y agoOP mentions that he received NSOs, not ISOs, so he would not be subject to AMT. He also wouldn't be taxed at capital gains rates on exercise but rather the spread would be taxed as regular compensation income. More info is available here: https://www.nceo.org/articles/stock-options-alternative-minimum-tax-amt https://www.nceo.org/articles/stock-options-alternative-mini...
- nullnilvoid 10y agoAgree. It is dirt cheap. I would have exercised the options anyway given the bad feelings. Bad feelings are the sunk cost. Don't let that affect your future investments.
- bluetwo 10y agoYep. Let some other sucker do the hard work and be spiteful by blowing any money gained on something frivolous.
- achompas 10y agoBut we don't know their private valuation as of right now. So OP isn't just out $4k+, he's also going to pay taxes on the private valuation of his shares.
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