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Yeah this just looks like poor/risky financial calculus on the part of the former employees. Also I always incorrectly think that these sorts of option traps a

Yeah this just looks like poor/risky financial calculus on the part of the former employees. Also I always incorrectly think that these sorts of option traps are public knowledge, but then every now and then I'm prove wrong by even very smart people I personally know, not being aware of these traps. Not sure how we fix this situation tbh. For starters "don't join a company without an extended option exercise period" is a decent first order heuristic, but not everyone has that luxury.

rconti 9y ago
I'd say "risky" rather than "poor". They probably knew it was "risky" in the sense that they were extending themselves but perhaps underestimated the tax consequences or risk of the company's fortunes turning. Many people just stick it out with their employer hoping that their options become liquid; in some ways that can also be risky/poor decision making. Maybe it's an unhealthy work environment or you've stopped learning/advancing in your career, or there's a real opportunity cost where you're foregoing a higher salary. Maybe these people left because it was the better life decision (or maybe they were terminated), but regardless, most of us would think long and hard about giving up, say, millions of dollars in potential value. Hell, even at $300k in debt it might be a good or worthwhile gamble. It's easy to dismiss this all as poor decision making, but there are real risk/reward calculations to be done here, and "walk away from millions of dollars" is not always the smart answer, even if it kills in the comment threads.
- gfodor 9y ago
  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-Investing/dp/1470110970 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.
  - xapata 9y ago
    Plus, in the event you have $300k of debt and no assets, you can file for bankruptcy.
    - cityzen 9y ago
      Isn’t this how we ended up with people like Donald Trump? Risky behavior pawned off on everyone else?
      - lovich 9y ago
        its not really moral, but its incentived behavior
      - xapata 9y ago
        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.
  - LeifCarrotson 9y ago
    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.
    - kemitche 9y ago
      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.
      - 9y ago
- kudokatz 9y ago
  > They probably knew it was "risky" in the sense that they were extending themselves but perhaps underestimated the tax consequences or risk of the company's fortunes turning "[over-]extending themselves" - risky "underestimated the tax consequences" - poor; this is a straightforward computation assuming you exercise your rights to get the latest 409a valuation after exercising a single share
caseysoftware 9y ago
Risky? Yes. Poor? That's yet to be seen.

rconti 9y ago

I'd say "risky" rather than "poor". They probably knew it was "risky" in the sense that they were extending themselves but perhaps underestimated the tax consequences or risk of the company's fortunes turning. Many people just stick it out with their employer hoping that their options become liquid; in some ways that can also be risky/poor decision making. Maybe it's an unhealthy work environment or you've stopped learning/advancing in your career, or there's a real opportunity cost where you're foregoing a higher salary. Maybe these people left because it was the better life decision (or maybe they were terminated), but regardless, most of us would think long and hard about giving up, say, millions of dollars in potential value. Hell, even at $300k in debt it might be a good or worthwhile gamble. It's easy to dismiss this all as poor decision making, but there are real risk/reward calculations to be done here, and "walk away from millions of dollars" is not always the smart answer, even if it kills in the comment threads.

gfodor 9y ago
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-Investing/dp/1470110970 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.
- xapata 9y ago
  Plus, in the event you have $300k of debt and no assets, you can file for bankruptcy.
  - cityzen 9y ago
    Isn’t this how we ended up with people like Donald Trump? Risky behavior pawned off on everyone else?
    - lovich 9y ago
      its not really moral, but its incentived behavior
    - xapata 9y ago
      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.
- LeifCarrotson 9y ago
  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.
  - kemitche 9y ago
    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.
    - 9y ago
kudokatz 9y ago
> They probably knew it was "risky" in the sense that they were extending themselves but perhaps underestimated the tax consequences or risk of the company's fortunes turning "[over-]extending themselves" - risky "underestimated the tax consequences" - poor; this is a straightforward computation assuming you exercise your rights to get the latest 409a valuation after exercising a single share

caseysoftware 9y ago

Risky? Yes. Poor? That's yet to be seen.