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What should you do with stock options during a recession?

179 points by jrdngonen 4y ago

scotty79 4y ago
If you have an option to buy something for $100 what you can buy at the open market at the moment for $28 what would be the reason to buy it for $100?
johnchristopher 4y ago
I'd like to know what to do with ~10 000 euros, right now. Where should I put it so it doesn't lose its value and keep a bit with inflation ? edit for a bit of context: Western Europe, renting, unlikely to be able to buy/invest into a house/flat, looking at gold ingots, not the nerve for crypto.
- steve76 4y ago
- nly 4y ago
  Probably best to just hold on to it. Annual inflation of 10% sounds awful, but over short periods it's not that bad.
- bombcar 4y ago
  If you're not in the US (and Euros sounds European somehow) you don't have access to I bonds - which would be the safest bet. Perhaps there is something similar?
  - notch656a 4y ago
    It's probably not worth the trouble, but I think anyone can start a US LLC and use the tax identification of that business to buy I-bonds.
    - jonas21 4y ago
      No, only individuals can buy I-bonds. EDIT: that's not right. please see below.
      - quesera 4y ago
        This is not correct. Individuals can buy $10K/yr. Married couples can each buy $10K/yr, and you can buy the same amount for children. Also, businesses can buy $10K/yr, trusts can buy $10K/yr, and you can purchase $5K/yr with a tax refund. It would be not unusual to be able to buy $45K/yr (4-person household), and if one of the family is self-employed, $55K/yr. .... That said, don't buy lots of I bonds without first considering the advantages of TIPS!
        jonas21 4y ago
        Ah, you're right. I had misread this chart earlier. Sorry about that. https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm https://www.treasurydirect.gov/indiv/research/indepth/ibonds...
  - johnchristopher 4y ago
    There's something similar but it's in the .9-1.5 interest rate before 30% off of the interests when it's due. In Europe I think you can't buy bonds from another EU country but you can buy eurobonds (which seems to be different but are still emitted by EU countries).
- tmountain 4y ago
  This is not financial advice, but stocks are getting cheaper every day. Invest into profitable companies that can weather the storm.
  - UkrainianJew 4y ago
    There's one caveat. Say a profitable company pays $1M dividends. With the industry-average 3% yield, this puts market cap at 32M. Currently you can get 3% risk-free with government bonds, and this number will go further up as the interest rate rises. Say, it goes to 6%. Now, in order to be competitive with bonds, the profitable company will need to find a way to pay 2M in dividends, or its cap will drop to 16M (i.e. the shares you bought will lose half the value).
    - roflyear 4y ago
      Plenty of stocks have value and pay zero dividends.
      - nopzor 4y ago
        and that’s why such stocks have fallen so much, as interest rates have risen. the two of you are actually agreeing with each other. the principle is similar.
- xiphias2 4y ago
  Half year ago it would have been hard tocsay anything, but right now even the stock market has realistic price. (Btw I'm in BTC)
- JonChesterfield 4y ago
  Buy something you want for 20000 and watch the debt inflate away?
  - nly 4y ago
    So the theory here is if you know you're going to buy a $20K item in 2 years time, and you know it's going to go up in price in that time, you're probably better off borrowing the money and buying it now. The problem of course is we often don't know either of these things, and having better cashflow, or a pile of savings, now might help you weather the coming storm.
  - adamsmith143 4y ago
    This always seems silly to me. You are making an assumption that your Income will inflate by the same amount. But I don't know anyone getting 8% raises each year in any industry.
    - throwaway12245 4y ago
      https://tradingeconomics.com/united-states/wage-growth https://tradingeconomics.com/united-states/wage-growth Wages in the United States increased 11.67 percent in April of 2022 over the same month in the previous year. source: U.S. Bureau of Economic Analysis
    - PheonixPharts 4y ago
      It still make sense as long as the thing you're buying is something you'll eventually need to buy anyway. Say there is a 20k car you need to get to work that you should purchase within a year. Then assume, in a simplified scenario, you can either take out a 6% annual loan, or just save up the money for a year and then buy the car. Now say the car raised in cost with inflation at 10%. In one year the wait and save will mean the car new costs $22k where as if you had just taken out the loan it would have been $21.2k. Typically the loan isn't the best thing you can do because a.) inflation isn't that high and b.) there are other ways to generate revenue with your money if you have it one hand. I still see plenty of those wacky startups offering 0% interest for a year. I made a $10k, necessary, purchase for my home last year using one of those and going to save quite a bit by doing that. There's also the darker truth that if shit really hits the fan, you can always default on debt, often without real risks of your stuff being repo'd. There's no equivalent if you wait to purchase something in the future.
- neilfrndes 4y ago
  I recommend reading 'The Intelligent Investor'. The book describes strategies that help you navigate all kinds of markets. https://en.m.wikipedia.org/wiki/The_Intelligent_Investor https://en.m.wikipedia.org/wiki/The_Intelligent_Investor. As counterintuitive as it seems, the book actually recommends buying stocks in a bear market since they are priced reasonably. Warren Buffet's famous quote comes to mind: “Be fearful when others are greedy, and greedy when others are fearful.” The book also talks about the importance of long-term investing and discipline.
  - pishpash 4y ago
    I don't know, people seem pretty greedy still. VIX barely at 30, PE10 near pre-pandemic highs, real yields negative out to 3-4 years, and markets are orderly. If you get weeks and weeks of 4% daily drops, real yields at 5%, and hedge funds being force liquidated like 2008, then you know real fear. Look at how far behind the Fed has gotten: https://www.longtermtrends.net/real-interest-rate/ https://www.longtermtrends.net/real-interest-rate/
    - ericmay 4y ago
      (This is not financial advice) Ignore the "be greedy"* part of the person you are replying to (although your hesitation is kind of proving their point a bit) but follow the advice of the Intelligent Investor. When markets go up, everyone is happy to continue to invest. When they go down? People stop investing. That's precisely what you shouldn't be doing. Staying the course and continuing to invest regularly is key. When markets are sour that's when people get nervous and alter their behavior. * Want to be greedy? Start buying Coinbase stock and Bitcoin. Notice how everyone is scared right now?
      - shshshd 4y ago
        This is great advice that bets that the system is a going concern. If the system collapses, then the bet goes sour. Of course, if the system collapses green pieces of paper will be just as valuable as any stock certificate.
- sakopov 4y ago
  Equities have been decimated. The housing market is starting to look like it's next. There is nowhere to hide right now.
  - swagasaurus-rex 4y ago
    Thank god?
    - xdennis 4y ago
      For which part?
      - _carbyau_ 4y ago
        For a lot of people, both! There are lots of people with zero shares and a simple dream to own their home. This is looking hopeful for many.
        dnissley 4y ago
        This is zero sum thinking -- however many people this helps, it will take just that many getting hurt in order for it to happen. Doesn't solve the root of the problem in the least, it's just a wealth transfer.
        _carbyau_ 4y ago
        Yup. But how many of the people who might be able to afford a home if it comes down 20% will care about the others. This is what a market does. Risks are taken and the result is that some will lose out. People are not guaranteed profits. Until you are a corporation with enough influence in government it seems...
        yellowapple 4y ago
        > however many people this helps, it will take just that many getting hurt in order for it to happen This presumes that the number of people this helps is equal to the number of people this hurts. That's unlikely, given how wealth concentration tends to work in capitalist economies (that of the US included). But yes, we need to address the root of the problem - the root of the problem (as applied to housing) being the fact that land is treated as ownable property in the first place. That's fine and dandy, but that produces rather nasty externalities that are long overdue to be internalized - specifically, via land value taxation.
- justapassenger 4y ago
  No one can predict the future. But generally time in market is more important that timing the market. Works only if you invest long term.
- ISL 4y ago
  It may be helpful to think through your intended holding period. As a companion to the sibling comment recommending the Intelligent Investor (realize that index funds didn't exist when Graham wrote that), I'd keep in mind the mantra, "price is what you pay, value is what you get". If the holding-period is decades, there are good arguments in favor of stocks/index funds. Shorter-term than that, it may be difficult to provide guidance with any real certainty.
- FinanceAnon 4y ago
  I would just hold it - I have sold most of my index fund holdings in the past 6-9 months and been just holding cash. I don't think stocks have reached the bottom yet, so holding cash at 0% return is still better than negative returns from stocks. Right now, it's about not taking losses. I also don't see the market and economy rebounding quickly after reaching bottom - they will stay flat for a while IMHO
  - ushakov 4y ago
    > holding cash at 0% as consumer prices are surging this no longer may be true my bet is on physical assets: guitars, gold, watches
    - subsubzero 4y ago
      Gold looks ok, I don't know about guitars but watches are plummeting just like the stockmarket.
      - kingnothing 4y ago
        Which watches are plummeting? I've had my eye on a couple of specifics for a while and they're still as expensive as ever.
        iancmceachern 4y ago
        Luxury collectable items typically suffer in a recession
  - atombender 4y ago
    As a counterpoint, I would quote the great John C Bogle: "Never, never get out of the market." [1] Knowing when the market has reached the bottom is not really possible. During the dot com crash in 2000-2001, investors sold all the way down to the bottom (and lots of them sold at the very bottom), and then they eventually sold all the way up to the peak, when instead they could have just held onto their shares. Rebalancing doesn't really work. That's another thing Bogle showed us. Of course, if you need the cash, that's another matter. But then you arguably shouldn't have invested it in the stock market to begin with. If you have a time horizon less than 5 years, the market is just too volatile. [1] https://youtu.be/1SLb1QJvTvg https://youtu.be/1SLb1QJvTvg
- senko 4y ago
  Go through the videos in Plain Bagel and Common Sense Investing (Ben Felix) YouTube channels, then read, read the sidebar in r/eupersonalfinance subreddit, and that will give you solid foundational knowledge and context for figuring out what's best for you.
- wollsmoth 4y ago
  I'm not sure if you can buy ibonds but those seem good for up to 10k usd. Otherwise, Either a targetdate fund, I use VFIFX which should give most benefits of a bull market while giving some cushion due to its diversification. Or, just a nice total market index fund should be a good option. It may drop a bit but it's as diversified as it gets. I use FZROX, but there are many others.
- User23 4y ago
  Is there some kind of inflation protected EUR denominated bond or note you can buy? If the maturity date is reasonable that might not be a bad place to park excess cash.
- motohagiography 4y ago
  It's a question of what you think is going to happen. Personally, I think there are a lot of other people who are looking for ways to get out of cash and into something that is portable and loses value at a slower rate than inflation as well. It implies increasing demand for alternative assets like art and collectables, and maybe small land purchases. If there's something you know about or enjoy, it may be worth just getting into buying something, like antique motorcycles, painting and sculpture, photography, classical instruments of the non-piano variety, fancy watches, wine auctions, and other niche high end collectables. Even the top level hi-fi systems from niche makers (McIntosh, Luxman, Audio Research) with limited supply look like they could still be in demand in a decade, just like a good 1970s amp or speakers still costs more than an iPod. If these sound extravagent, the alternative at that level of investment is to buy a small crypto mining rig. Personally I would rather just take the hi-fi system or the instruments. :)
- shshshd 4y ago
  10k is not that much money. I know it takes a lot of effort to save, but its small change. If you have somewhere to store it, buy consumable goods. - Several hundred dollars each of tuna, prosciutto, a wheel of Parmesan, jerky, rice, flour. - If you have an oil/wood heater fill up the tank. If gas buy plenty of wool sweaters. - If you have to drive to work, get a scooter. - If you live in Czechia, or Finland, (you're not Swiss I gather) a rifle, shotgun and/or pistol. Otherwise upgrade your locks - Any left over money (if any) buy an assortment of gold, silver and what not. This might all seem doom gloom, and it is. But inflation is the least of our concerns. We're headed straight to an early 90s Soviet style collapse of our economies.
  - pavlov 4y ago
    I can’t really agree with your prognosis, but honestly this advice is amazing because outside of the apocalyptic context it’s so fun. Got $10k? Buy a scooter, prosciutto and a wheel of Parmesan! Why shouldn’t I spend like an Italian small-town bachelor in 1975, if the world is ending anyway.
  - roflyear 4y ago
    Why do you think the world is ending?
  - bergenty 4y ago
    But why? Who wants to eat all that processed food when you can just have fresh food instead.
  - 8note 4y ago
    If I want a lot of tuna, I'm going dumpster diving at a sysco. Same with flour, really
  - Firmwarrior 4y ago
    Probably not a bad idea to have a few weeks' worth of non-perishable food around just in case there's a big power outage/earthquake/whatever If this whole societal house of cards comes tumbling down, though, I think most of the people posting on HackerNews are going to be screwed (relevant: https://ext.penny-arcade.com/comic/2019/03/15/deer-diary https://ext.penny-arcade.com/comic/2019/03/15/deer-diary )
- quickthrower2 4y ago
  Keep it as a cash reserve IMO. Save more.
- vishnugupta 4y ago
  You haven't said what your time horizon is and risk appetite. i.e., For how long do you not need this money and what % of capital are you OK to risk without which it's almost impossible to advise you. That said; during times of uncertainty cash is king so my advise is to keep it in a time deposit for 6-8 months and wait for the markets to stabilise. Based on yesterday's fed FOMC guideline they believe there's still a long way to go before they tame the inflation and they are likely to raise interest rates as high as 4%. I don't know if markets have priced 4% in yet or not. All this is to say next 8-10 months are going to be extremely choppy/volatile. Once you see signs of stability and recovery you can enter equity markets through DCA.
- jokethrowaway 4y ago
  Mortgage to buy properties overseas you can afford. Fractional ownership of real estate. Alternatively keep cash.
- solumunus 4y ago
  Energy/renewables. They are highly resistant to inflation. In my opinion they're the best bet over the next 5-10 years with current macro conditions and the huge ongoing investment into renewable infrastructure. Some good FTSE options paying nice dividends: https://uk.finance.yahoo.com/quote/EGL.L https://uk.finance.yahoo.com/quote/EGL.L https://uk.finance.yahoo.com/quote/TRIG.L https://uk.finance.yahoo.com/quote/TRIG.L https://uk.finance.yahoo.com/quote/UKW.L https://uk.finance.yahoo.com/quote/UKW.L Uranium spot price should also be stable/grow depending on many factors: https://uk.finance.yahoo.com/quote/YCA.L https://uk.finance.yahoo.com/quote/YCA.L Disclaimer: far from an expert.
mgarfias 4y ago
article starts off talking grants, but then is talking about options. Pick one man, they're not the same.
- FooBarBizBazz 4y ago
  I get your point -- most people don't really know what stock options are or that they are different from shares -- but options grants and RSU grants are both grants.
sbf501 4y ago
Cry whilst they expire underwater? That's what I did from 2000-2005.
ramesh31 4y ago
Hope that we have another toilet paper shortage, so they get some use.
jcdavis 4y ago
Yet another reason not to join any startup that still does 90 day option expiration.
- TrainedMonkey 4y ago
  In US 90 day option expiration is required by law for ISOs which have favorable tax treatment.
  - jcdavis 4y ago
    Yes, but grants that convert to NSOs after departure are possible. Worse from a taxation perspective, but better than losing them.
anon291 4y ago
I'm planning on exercising some of mine (in the post-resignation 90 day period) via EquityBee. I don't want to lower my own cash reserves now due to a looming recession, but do believe the company has upside. EquityBee (and a few other companies, like vested, all of whom I think are legitimate) gives me money to exercise the options in exchange for ~30% of the shares should the company go public, plus repayment of the original loan. It's a win-win for me. The worst outcome is I make no money; the best is that I keep 70% of my shares without paying for them. They even pay AMT.
- JumpCrisscross 4y ago
  > worst outcome is I make no money; the best is that I keep 70% of my shares without paying for them. They even pay AMT I don’t have the details to be able to say anything useful. But there might be a narrow window of tax circumstances in which 70% of the equity without AMT but with loan costs is better than 100% with AMT + marginal long-term taxes and no loan costs. (Such schemes make sense if you’re concerned about not being able to exercise your options on short notice after getting laid off. If you have the liquidity, however, set it aside, take the yield and hold form after talking to a CPA.)
  - benmanns 4y ago
    It works out in the event that the shares end up worthless.
    - JumpCrisscross 4y ago
      > works out in the event that the shares end up worthless Then you're at parity with never exercising.
      - benmanns 4y ago
        Yes, but you get the benefit of .7x exercising with the cost of never exercising. Exercise, no successful IPO: lose $x exercise cost Exercise, successful IPO: lose $x exercise cost, gain $y share sale benefit No exercise, no successful IPO: gain/lose nothing No exercise, successful IPO: gain/lose nothing Service exercise, no successful IPO: lose nothing, maybe gain some AMT credits or capital loss carryovers Service exercise, successful IPO: lose $x exercise cost plus interest, gain 0.7*$y share sale benefit Your best best case is exercising yourself and getting the IPO, but you have to weigh that against the likelihood of it occurring and your personal risk tolerance for the $x cost to exercise. I would never buy a lottery ticket, but I will always accept even .01% of a free lottery ticket.
MrMan 4y ago
In web 1.0 mine all became worthless. I went on to do other things than writing web apps.
meatmanek 4y ago
This article uses your net effective tax rate to calculate the taxes on the bargain element -- 32.25% on someone earning $150k in California. They should be using your _marginal_ tax rate for that calculation, which would be 24+9.3=33.3% on the first 170050-150000=$20,050 of the bargain element, 32+9.3=41.3% on the next 215950-170050=$45900, and 35+9.3% on the rest. Or, much easier is to use a calculator like the one they link[3], and calculate your total taxes on your current earnings, calculate total taxes on the earnings if you were to exercise, and then subtract. I calculate $81,599-$38,038 = $43,561 in additional taxes, rather than the $41,893 they said. I agree with the author's take on ISOs: > It’s a bit complicated – and dry – so if you have ISOs you should probably talk to your tax person My opinion on ISOs is essentially that for some middle ground between "few enough ISOs that you don't trigger AMT" and "so many ISOs that the potential tax savings are more than big enough to pay for a financial professional", it's not worth it to try and exercise ISOs early. AMT on ISOs will complicate your taxes for years to come: in some circumstances, you can recover some of the money you paid as AMT on the ISOs in future years -- essentially, ISO bargain element is a specific category of AMT-taxable income which gives you an AMT credit for future years, which you can recover with form 8801 [4]. For several years after my ISO exercise, I was able to eat away that credit by paying the AMT tax amount when it was _lower_ than my standard income tax. 1. https://taxfoundation.org/2022-tax-brackets/ 2. https://www.nerdwallet.com/article/taxes/california-state-tax 3. https://smartasset.com/taxes/income-taxes#H3aXczXUcM 4. https://www.irs.gov/forms-pubs/about-form-8801
subsubzero 4y ago
I gave my Wife money to exercise her ISO's(startup before IPO) for her first 1.75 years of shares when the company valuation hadn't changed. Her company went public and the stock jumped and then crashed, I think the current price per share is lower than her exercise price so she is underwater and the money I gave her is worth less as shares vs. cash I originally gave her. Really a huge bummer as this job up-ended our life and she has absolutely nothing to show for 3 brutal years of hard work. I guess the only thing is wait it out and see if the shares recover.
- edgefield 4y ago
  This is the sunk cost fallacy. The best option might be to leave and find something else.
  - s1artibartfast 4y ago
    They are talking about the shares, which are already fully owned and liquid. The question is to sell them and invest the cash somewhere better(??) or HODL.
    - refurb 4y ago
      It's a startup before IPO, so not liquid (unless the company offers to buy-back). This is a great reason to value options at $0 when taking an offer. It's a lottery and you shouldn't assume you'll see any money from then. If you do, it's all gravy.
      - s1artibartfast 4y ago
        You missed the part where they said they are now post IPO >Her company went public and the stock jumped and then crashed,
    - anonymousiam 4y ago
      Options are not shares -- they are an option to buy shares at a specified price.
nemo44x 4y ago
Right now you want to be vesting in a promising company that is well funded and has revenue streams coming in. We are in the early days of creating the new winners of the next bull market.
maerF0x0 4y ago
> If you leave the company, your options will expire if you don’t exercise them. Let me repeat that: if you leave the company, your options will expire if you don’t exercise them. The exact timeline of how quickly they expire depends on option type and company policy, but the termination window is commonly as short as 90 days. So, exercising your options enables you to actually own what you helped build. This is why I choose to not work for companies that do not have extended exercise windows -- and IMO neither should you. [1]: https://blog.samaltman.com/employee-equity#:~:text=2)%20Most%20employees,employee%20gets%20terminated https://blog.samaltman.com/employee-equity#:~:text=2)%20Most.... [2]: https://github.com/holman/extended-exercise-windows https://github.com/holman/extended-exercise-windows
- lumost 4y ago
  I only had options at one firm which was Series D and had ~300 employees. The company issued them at a price which was rich, then steadily issued new options at lower price points. The management made it a practice to have periodic calls which would talk about how they were 12-18 months away from IPO and the price target was going to be ~5x the rich price. Then there would be talks where engineering management would pitch fantasies about how stock pricing worked for IPOs. Meanwhile growth had stalled, and competition was getting stronger. I left all my options un-purchased. 6 years later when they had a Private Equity buyout I probably would have made somewhere between a -50% and 2x return (depending on liquidation preferences, subsequent issuance, and debt). At best.. I would have had an non-liquid 12% rate of return, losing out to the S&P500 over the last 6 years.
  - dijonman2 4y ago
    Options are typically not profitable unless you win the lottery. I view them as a scam and RSUs are met with the same level of skepticism.
  - sbierwagen 4y ago
    As you say when you mention liquidation preferences, I wouldn't be surprised if a PE buyout of a distressed company zeroed out employee equity.
jrdngonen 4y ago
I help work on Compound (https://withcompound.com/ https://withcompound.com/) (author of the essay also works at Compound). We help tech employees manage their finances and specialize in equity compensation. Our essay on equity and taxes may also be useful to those looking to better understand stock options: https://manual.withcompound.com/equity-guide-for-employees-at-fast-growing-companies https://manual.withcompound.com/equity-guide-for-employees-a...
redshirtrob 4y ago
This is a fine article. It covers a lot of the decisions one must consider when considering stock options. I just think it's a little abstract for folks who haven't lived the experience. I actually tried to enumerate the scenarios. When I hit five variables I realized the advice would be mostly worthless. That's 32 separate outcomes, some of which are pretty subjective, e.g. do I think this is a viable company? Nevertheless, I've been down this road a few times. I have some wins and losses. I think this article misses an important point: Exercising is not an all or nothing proposition. For example: If I join a startup and leave after a year, the difference between my strike price and the 409a price might be non-zero. I can still exercise a percentage of my options to avoid AMT. Maybe I can't exercise all of them without triggering AMT, but chances are I can exercise a fair amount. If I'm offered an early exercise, I don't have to do 100%. I can do a number that fits my budget. I just have to make sure I file my 83b election form.
known 4y ago
deleted 4y ago
[deleted]
dqpb 4y ago
If the answer isn’t “exercise them” why are you working at the company?
- yardstick 4y ago
  For the generous salary I would expect.
- phendrenad2 4y ago
  Dinosaurs won't hire me because I don't have a college degree. MAANGA won't hire me because I'm not good at leetcoding. That leaves startups.
  - astrange 4y ago
    Fairly sure maybe half of MANGA knows what leetcode even is. I for one don't know what it is.
    - guessmyname 4y ago
      > Fairly sure maybe half of MANGA knows what leetcode even is. I for one don't know what it is. https://leetcode.com/ https://leetcode.com/ is a website famous for listing a repository of programming exercises that you can solve by implementing an algorithm categorized as Easy, Medium, or Hard depending on its complexity. Many technology companies, including, but not limited to, Facebook, Amazon, Apple, Netflix, and Google, (aka. FAANG) use the same type of problems during technical interviews to evaluate candidates’ problem solving skills.
    - kortilla 4y ago
      It’s how the interview process works for all swe hires and MANGA. You just don’t know it name.
      - astrange 4y ago
        I do interview people at a MANGA and think I know more about it than you do.
alfiedotwtf 4y ago
All these comments... Does anyone actually work at a company because they do interesting stuff, rather than option terms?
- twicetwice 4y ago
  I do interesting stuff in my free time. I make money in my work time. Not quite really—I do enjoy my work and my time at my job, and I would sacrifice some compensation to work at a more interesting/meaningful/fun company. I don't price the enjoyment of 50% of my waking hours at zero, of course. But my primary purpose in working a job is making money, and I don't think that's anything to be ashamed about. I want to buy a house one day.
  - alfiedotwtf 4y ago
    Ok, that's a good take. To be honest, I've never thought about it like that. Thanks for the perspective.
- deleted 4y ago
  [deleted]
- jokethrowaway 4y ago
  No, but occasionally you get something interesting at work. Very rarely. 99% it's all implement this API route or implement this react component. Waste of time, but pays well and will let you retire early.
todd3834 4y ago
I worked at a unicorn startup for about 1.5 years. It started to become clear to me that I probably wasn’t going to make a comparable income to what I was making before in a public company so I left. I exercised my shares. A year later they went public through a SPAC. the shares got a hair cut through the SPAC ratio. Total comp was still really bad but shares were locked up for 6 months or so (maybe longer I don’t remember). I couldn’t sell them and now that I can the total value is under $4,000. I paid over $1k exercising them which felt like an insane bargain. Maybe it will work out better for some of you though. I feel like if you are not extremely passionate about a startup and you are not one of the original founders… great place to learn and build your career but don’t think it will make you rich
DeathArrow 4y ago
I don't care about options. Let me see the money. Then I can buy shares in whatever company I want or invest in an index fund, managed fund or ETF.
- goralph 4y ago
  Options give us 'regular folk' exposure to private equity, which comes with potential for very high (& improbable) returns. As a salaried employee there's really no better vehicle for this kind of exposure. You'd need to start your own business, or play with leverage - which is dangerous. That said, the common adage of 'winning the startup lottery' is very true. The likelihood of actually (i) joining early enough, (ii) getting a reasonable grant, (iii) having market conditions work in your favour, (iv) the company growing exponentially for years, (v) you actually being able to stay the 3-4 years to vest enough options, and (vi) a liquidation event happening .... is quite low. Most, if not all, of these factors need to happen together.
jiveturkey 4y ago
directionally correct, but too many errors.
unicorn_eng 4y ago
I'm currently at a unicorn SaaS startup. I have 11,500 ISOs, about 7000 of which I've vested and exercised (I've got about 1.5 years left till I'm fully vested). My strike price is $1.50, which to me is a bargain, especially since there was a tender offer last year of around $14. There are ~70M outstanding shares. Other stats: $60M ARR, 120% NRR last year, almost 100% YoY growth during 2021, raised $110M at 40x revenue last year, high NPS, company still has over $110M in the bank, TAM is in the tens of billions, current market penetration is <5%, planning to go public at $200M ARR. So the potential upside is huge. Work environment is great, I have a great boss and a decently challenging/significant role. I'm a senior engineer making around $170k/year. I'm curious what you all think - is it worth the risk of staying until I vest? The alternative would be to join a public software company and increase my salary significantly (which would help so much right now - we need a larger house for our kids).
- staplers 4y ago
  You can do a lot more with liquid capital than options. Guaranteed money is worth more than maybe money, especially if you have a family. If you truly believe they're valuable, then invest when they ipo.
- molsongolden 4y ago
  Extremely simplified thought exercise with very rough possible #’s: Vesting 2,875 shares per year 2,875 @ $(14-1.50)= $36k/yr Assuming IPO @ $200MM ARR, public cloud SaaS benchmark rev multiple was roughly 20x last year before the crash. That’s a $4B valuation, ignoring dilution from here to there: $4B/70M shares = $57/share 2,875 @ $(57-1.5) = $160k/yr That’s assuming the market recovers to a similar level, ignoring further dilution, assuming the company continues executing and doesn’t hit unforeseen difficulties, etc. Can you make that much with less risk by changing jobs? - Another consideration might be diversification if your vested options represent a large % of your portfolio. - Another consideration, “work environment is great” isn’t something that everybody can say and this might be worth more than the raise.
  - unicorn_eng 4y ago
victor9000 4y ago
Startup equity will always be worthless for 99.9% of people, and the second it's worth something more, it will be lawyered away from you. So from a business perspective, you should never work at a startup if you're not a founder. dvs: please convince me otherwise
andrewaylett 4y ago
It's perhaps worth noting that this the article is very US-centric. I'm in the UK, and I've never had an opportunity to exercise options that didn't come alongside an offer from the company to buy the shares. And in my experience, it's rare to exercise and hold. Even if you do, you can sell enough shares to cover the tax and keep the rest. My current employer has (and uses) the right to repurchase any shares I hold at the current "fair market value" if I leave the business. That's also fairly standard for privately-held companies, it seems.
lamontcg 4y ago
The big thing to avoid is exercising at a high price, paying all your taxes, then watching the shares plummet the next year, and eventually selling at a loss and winding up with only the maximum carryover cap gains loss every year after that. So the worst outcome is that your strike is $1.28 you exercise at $3.13 (costing you $80k + $40k in taxes or whatever -- it gets worse the better the stock is doing, which is one of many reasons why early exercise of options is risky but good) but you're stuck in a holding period while you go public, then when you exit that period you're at $0.50 or something like that, and you've passed over into a new tax year, and you have no cap gains to offset the losses on the stock. This happened to a lot of employees at dot com companies in the 2001 collapse.

179 points by jrdngonen 4y ago

If you have an option to buy something for $100 what you can buy at the open market at the moment for $28 what would be the reason to buy it for $100?

johnchristopher 4y ago

I'd like to know what to do with ~10 000 euros, right now. Where should I put it so it doesn't lose its value and keep a bit with inflation ? edit for a bit of context: Western Europe, renting, unlikely to be able to buy/invest into a house/flat, looking at gold ingots, not the nerve for crypto.

steve76 4y ago
nly 4y ago
Probably best to just hold on to it. Annual inflation of 10% sounds awful, but over short periods it's not that bad.
bombcar 4y ago
If you're not in the US (and Euros sounds European somehow) you don't have access to I bonds - which would be the safest bet. Perhaps there is something similar?
- notch656a 4y ago
  It's probably not worth the trouble, but I think anyone can start a US LLC and use the tax identification of that business to buy I-bonds.
  - jonas21 4y ago
    No, only individuals can buy I-bonds. EDIT: that's not right. please see below.
    - quesera 4y ago
      This is not correct. Individuals can buy $10K/yr. Married couples can each buy $10K/yr, and you can buy the same amount for children. Also, businesses can buy $10K/yr, trusts can buy $10K/yr, and you can purchase $5K/yr with a tax refund. It would be not unusual to be able to buy $45K/yr (4-person household), and if one of the family is self-employed, $55K/yr. .... That said, don't buy lots of I bonds without first considering the advantages of TIPS!
      - jonas21 4y ago
        Ah, you're right. I had misread this chart earlier. Sorry about that. https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm https://www.treasurydirect.gov/indiv/research/indepth/ibonds...
- johnchristopher 4y ago
  There's something similar but it's in the .9-1.5 interest rate before 30% off of the interests when it's due. In Europe I think you can't buy bonds from another EU country but you can buy eurobonds (which seems to be different but are still emitted by EU countries).
tmountain 4y ago
This is not financial advice, but stocks are getting cheaper every day. Invest into profitable companies that can weather the storm.
- UkrainianJew 4y ago
  There's one caveat. Say a profitable company pays $1M dividends. With the industry-average 3% yield, this puts market cap at 32M. Currently you can get 3% risk-free with government bonds, and this number will go further up as the interest rate rises. Say, it goes to 6%. Now, in order to be competitive with bonds, the profitable company will need to find a way to pay 2M in dividends, or its cap will drop to 16M (i.e. the shares you bought will lose half the value).
  - roflyear 4y ago
    Plenty of stocks have value and pay zero dividends.
    - nopzor 4y ago
      and that’s why such stocks have fallen so much, as interest rates have risen. the two of you are actually agreeing with each other. the principle is similar.
xiphias2 4y ago
Half year ago it would have been hard tocsay anything, but right now even the stock market has realistic price. (Btw I'm in BTC)
JonChesterfield 4y ago
Buy something you want for 20000 and watch the debt inflate away?
- nly 4y ago
  So the theory here is if you know you're going to buy a $20K item in 2 years time, and you know it's going to go up in price in that time, you're probably better off borrowing the money and buying it now. The problem of course is we often don't know either of these things, and having better cashflow, or a pile of savings, now might help you weather the coming storm.
- adamsmith143 4y ago
  This always seems silly to me. You are making an assumption that your Income will inflate by the same amount. But I don't know anyone getting 8% raises each year in any industry.
  - throwaway12245 4y ago
    https://tradingeconomics.com/united-states/wage-growth https://tradingeconomics.com/united-states/wage-growth Wages in the United States increased 11.67 percent in April of 2022 over the same month in the previous year. source: U.S. Bureau of Economic Analysis
  - PheonixPharts 4y ago
    It still make sense as long as the thing you're buying is something you'll eventually need to buy anyway. Say there is a 20k car you need to get to work that you should purchase within a year. Then assume, in a simplified scenario, you can either take out a 6% annual loan, or just save up the money for a year and then buy the car. Now say the car raised in cost with inflation at 10%. In one year the wait and save will mean the car new costs $22k where as if you had just taken out the loan it would have been $21.2k. Typically the loan isn't the best thing you can do because a.) inflation isn't that high and b.) there are other ways to generate revenue with your money if you have it one hand. I still see plenty of those wacky startups offering 0% interest for a year. I made a $10k, necessary, purchase for my home last year using one of those and going to save quite a bit by doing that. There's also the darker truth that if shit really hits the fan, you can always default on debt, often without real risks of your stuff being repo'd. There's no equivalent if you wait to purchase something in the future.
neilfrndes 4y ago
I recommend reading 'The Intelligent Investor'. The book describes strategies that help you navigate all kinds of markets. https://en.m.wikipedia.org/wiki/The_Intelligent_Investor https://en.m.wikipedia.org/wiki/The_Intelligent_Investor. As counterintuitive as it seems, the book actually recommends buying stocks in a bear market since they are priced reasonably. Warren Buffet's famous quote comes to mind: “Be fearful when others are greedy, and greedy when others are fearful.” The book also talks about the importance of long-term investing and discipline.
- pishpash 4y ago
  I don't know, people seem pretty greedy still. VIX barely at 30, PE10 near pre-pandemic highs, real yields negative out to 3-4 years, and markets are orderly. If you get weeks and weeks of 4% daily drops, real yields at 5%, and hedge funds being force liquidated like 2008, then you know real fear. Look at how far behind the Fed has gotten: https://www.longtermtrends.net/real-interest-rate/ https://www.longtermtrends.net/real-interest-rate/
  - ericmay 4y ago
    (This is not financial advice) Ignore the "be greedy"* part of the person you are replying to (although your hesitation is kind of proving their point a bit) but follow the advice of the Intelligent Investor. When markets go up, everyone is happy to continue to invest. When they go down? People stop investing. That's precisely what you shouldn't be doing. Staying the course and continuing to invest regularly is key. When markets are sour that's when people get nervous and alter their behavior. * Want to be greedy? Start buying Coinbase stock and Bitcoin. Notice how everyone is scared right now?
    - shshshd 4y ago
      This is great advice that bets that the system is a going concern. If the system collapses, then the bet goes sour. Of course, if the system collapses green pieces of paper will be just as valuable as any stock certificate.
sakopov 4y ago
Equities have been decimated. The housing market is starting to look like it's next. There is nowhere to hide right now.
- swagasaurus-rex 4y ago
  Thank god?
  - xdennis 4y ago
    For which part?
    - _carbyau_ 4y ago
      For a lot of people, both! There are lots of people with zero shares and a simple dream to own their home. This is looking hopeful for many.
      - dnissley 4y ago
        This is zero sum thinking -- however many people this helps, it will take just that many getting hurt in order for it to happen. Doesn't solve the root of the problem in the least, it's just a wealth transfer.
        _carbyau_ 4y ago
        Yup. But how many of the people who might be able to afford a home if it comes down 20% will care about the others. This is what a market does. Risks are taken and the result is that some will lose out. People are not guaranteed profits. Until you are a corporation with enough influence in government it seems...
        yellowapple 4y ago
        > however many people this helps, it will take just that many getting hurt in order for it to happen This presumes that the number of people this helps is equal to the number of people this hurts. That's unlikely, given how wealth concentration tends to work in capitalist economies (that of the US included). But yes, we need to address the root of the problem - the root of the problem (as applied to housing) being the fact that land is treated as ownable property in the first place. That's fine and dandy, but that produces rather nasty externalities that are long overdue to be internalized - specifically, via land value taxation.
justapassenger 4y ago
No one can predict the future. But generally time in market is more important that timing the market. Works only if you invest long term.
ISL 4y ago
It may be helpful to think through your intended holding period. As a companion to the sibling comment recommending the Intelligent Investor (realize that index funds didn't exist when Graham wrote that), I'd keep in mind the mantra, "price is what you pay, value is what you get". If the holding-period is decades, there are good arguments in favor of stocks/index funds. Shorter-term than that, it may be difficult to provide guidance with any real certainty.
FinanceAnon 4y ago
I would just hold it - I have sold most of my index fund holdings in the past 6-9 months and been just holding cash. I don't think stocks have reached the bottom yet, so holding cash at 0% return is still better than negative returns from stocks. Right now, it's about not taking losses. I also don't see the market and economy rebounding quickly after reaching bottom - they will stay flat for a while IMHO
- ushakov 4y ago
  > holding cash at 0% as consumer prices are surging this no longer may be true my bet is on physical assets: guitars, gold, watches
  - subsubzero 4y ago
    Gold looks ok, I don't know about guitars but watches are plummeting just like the stockmarket.
    - kingnothing 4y ago
      Which watches are plummeting? I've had my eye on a couple of specifics for a while and they're still as expensive as ever.
      - iancmceachern 4y ago
        Luxury collectable items typically suffer in a recession
- atombender 4y ago
  As a counterpoint, I would quote the great John C Bogle: "Never, never get out of the market." [1] Knowing when the market has reached the bottom is not really possible. During the dot com crash in 2000-2001, investors sold all the way down to the bottom (and lots of them sold at the very bottom), and then they eventually sold all the way up to the peak, when instead they could have just held onto their shares. Rebalancing doesn't really work. That's another thing Bogle showed us. Of course, if you need the cash, that's another matter. But then you arguably shouldn't have invested it in the stock market to begin with. If you have a time horizon less than 5 years, the market is just too volatile. [1] https://youtu.be/1SLb1QJvTvg https://youtu.be/1SLb1QJvTvg
senko 4y ago
Go through the videos in Plain Bagel and Common Sense Investing (Ben Felix) YouTube channels, then read, read the sidebar in r/eupersonalfinance subreddit, and that will give you solid foundational knowledge and context for figuring out what's best for you.
wollsmoth 4y ago
I'm not sure if you can buy ibonds but those seem good for up to 10k usd. Otherwise, Either a targetdate fund, I use VFIFX which should give most benefits of a bull market while giving some cushion due to its diversification. Or, just a nice total market index fund should be a good option. It may drop a bit but it's as diversified as it gets. I use FZROX, but there are many others.
User23 4y ago
Is there some kind of inflation protected EUR denominated bond or note you can buy? If the maturity date is reasonable that might not be a bad place to park excess cash.
motohagiography 4y ago
It's a question of what you think is going to happen. Personally, I think there are a lot of other people who are looking for ways to get out of cash and into something that is portable and loses value at a slower rate than inflation as well. It implies increasing demand for alternative assets like art and collectables, and maybe small land purchases. If there's something you know about or enjoy, it may be worth just getting into buying something, like antique motorcycles, painting and sculpture, photography, classical instruments of the non-piano variety, fancy watches, wine auctions, and other niche high end collectables. Even the top level hi-fi systems from niche makers (McIntosh, Luxman, Audio Research) with limited supply look like they could still be in demand in a decade, just like a good 1970s amp or speakers still costs more than an iPod. If these sound extravagent, the alternative at that level of investment is to buy a small crypto mining rig. Personally I would rather just take the hi-fi system or the instruments. :)
shshshd 4y ago
10k is not that much money. I know it takes a lot of effort to save, but its small change. If you have somewhere to store it, buy consumable goods. - Several hundred dollars each of tuna, prosciutto, a wheel of Parmesan, jerky, rice, flour. - If you have an oil/wood heater fill up the tank. If gas buy plenty of wool sweaters. - If you have to drive to work, get a scooter. - If you live in Czechia, or Finland, (you're not Swiss I gather) a rifle, shotgun and/or pistol. Otherwise upgrade your locks - Any left over money (if any) buy an assortment of gold, silver and what not. This might all seem doom gloom, and it is. But inflation is the least of our concerns. We're headed straight to an early 90s Soviet style collapse of our economies.
- pavlov 4y ago
  I can’t really agree with your prognosis, but honestly this advice is amazing because outside of the apocalyptic context it’s so fun. Got $10k? Buy a scooter, prosciutto and a wheel of Parmesan! Why shouldn’t I spend like an Italian small-town bachelor in 1975, if the world is ending anyway.
- roflyear 4y ago
  Why do you think the world is ending?
- bergenty 4y ago
  But why? Who wants to eat all that processed food when you can just have fresh food instead.
- 8note 4y ago
  If I want a lot of tuna, I'm going dumpster diving at a sysco. Same with flour, really
- Firmwarrior 4y ago
  Probably not a bad idea to have a few weeks' worth of non-perishable food around just in case there's a big power outage/earthquake/whatever If this whole societal house of cards comes tumbling down, though, I think most of the people posting on HackerNews are going to be screwed (relevant: https://ext.penny-arcade.com/comic/2019/03/15/deer-diary https://ext.penny-arcade.com/comic/2019/03/15/deer-diary )
quickthrower2 4y ago
Keep it as a cash reserve IMO. Save more.
vishnugupta 4y ago
You haven't said what your time horizon is and risk appetite. i.e., For how long do you not need this money and what % of capital are you OK to risk without which it's almost impossible to advise you. That said; during times of uncertainty cash is king so my advise is to keep it in a time deposit for 6-8 months and wait for the markets to stabilise. Based on yesterday's fed FOMC guideline they believe there's still a long way to go before they tame the inflation and they are likely to raise interest rates as high as 4%. I don't know if markets have priced 4% in yet or not. All this is to say next 8-10 months are going to be extremely choppy/volatile. Once you see signs of stability and recovery you can enter equity markets through DCA.
jokethrowaway 4y ago
Mortgage to buy properties overseas you can afford. Fractional ownership of real estate. Alternatively keep cash.
solumunus 4y ago
Energy/renewables. They are highly resistant to inflation. In my opinion they're the best bet over the next 5-10 years with current macro conditions and the huge ongoing investment into renewable infrastructure. Some good FTSE options paying nice dividends: https://uk.finance.yahoo.com/quote/EGL.L https://uk.finance.yahoo.com/quote/EGL.L https://uk.finance.yahoo.com/quote/TRIG.L https://uk.finance.yahoo.com/quote/TRIG.L https://uk.finance.yahoo.com/quote/UKW.L https://uk.finance.yahoo.com/quote/UKW.L Uranium spot price should also be stable/grow depending on many factors: https://uk.finance.yahoo.com/quote/YCA.L https://uk.finance.yahoo.com/quote/YCA.L Disclaimer: far from an expert.

mgarfias 4y ago

article starts off talking grants, but then is talking about options. Pick one man, they're not the same.

FooBarBizBazz 4y ago
I get your point -- most people don't really know what stock options are or that they are different from shares -- but options grants and RSU grants are both grants.

sbf501 4y ago

Cry whilst they expire underwater? That's what I did from 2000-2005.

ramesh31 4y ago

Hope that we have another toilet paper shortage, so they get some use.

jcdavis 4y ago

Yet another reason not to join any startup that still does 90 day option expiration.

TrainedMonkey 4y ago
In US 90 day option expiration is required by law for ISOs which have favorable tax treatment.
- jcdavis 4y ago
  Yes, but grants that convert to NSOs after departure are possible. Worse from a taxation perspective, but better than losing them.

anon291 4y ago

I'm planning on exercising some of mine (in the post-resignation 90 day period) via EquityBee. I don't want to lower my own cash reserves now due to a looming recession, but do believe the company has upside. EquityBee (and a few other companies, like vested, all of whom I think are legitimate) gives me money to exercise the options in exchange for ~30% of the shares should the company go public, plus repayment of the original loan. It's a win-win for me. The worst outcome is I make no money; the best is that I keep 70% of my shares without paying for them. They even pay AMT.

JumpCrisscross 4y ago
> worst outcome is I make no money; the best is that I keep 70% of my shares without paying for them. They even pay AMT I don’t have the details to be able to say anything useful. But there might be a narrow window of tax circumstances in which 70% of the equity without AMT but with loan costs is better than 100% with AMT + marginal long-term taxes and no loan costs. (Such schemes make sense if you’re concerned about not being able to exercise your options on short notice after getting laid off. If you have the liquidity, however, set it aside, take the yield and hold form after talking to a CPA.)
- benmanns 4y ago
  It works out in the event that the shares end up worthless.
  - JumpCrisscross 4y ago
    > works out in the event that the shares end up worthless Then you're at parity with never exercising.
    - benmanns 4y ago
      Yes, but you get the benefit of .7x exercising with the cost of never exercising. Exercise, no successful IPO: lose $x exercise cost Exercise, successful IPO: lose $x exercise cost, gain $y share sale benefit No exercise, no successful IPO: gain/lose nothing No exercise, successful IPO: gain/lose nothing Service exercise, no successful IPO: lose nothing, maybe gain some AMT credits or capital loss carryovers Service exercise, successful IPO: lose $x exercise cost plus interest, gain 0.7*$y share sale benefit Your best best case is exercising yourself and getting the IPO, but you have to weigh that against the likelihood of it occurring and your personal risk tolerance for the $x cost to exercise. I would never buy a lottery ticket, but I will always accept even .01% of a free lottery ticket.

MrMan 4y ago

In web 1.0 mine all became worthless. I went on to do other things than writing web apps.

meatmanek 4y ago

This article uses your net effective tax rate to calculate the taxes on the bargain element -- 32.25% on someone earning $150k in California. They should be using your _marginal_ tax rate for that calculation, which would be 24+9.3=33.3% on the first 170050-150000=$20,050 of the bargain element, 32+9.3=41.3% on the next 215950-170050=$45900, and 35+9.3% on the rest. Or, much easier is to use a calculator like the one they link[3], and calculate your total taxes on your current earnings, calculate total taxes on the earnings if you were to exercise, and then subtract. I calculate $81,599-$38,038 = $43,561 in additional taxes, rather than the $41,893 they said. I agree with the author's take on ISOs: > It’s a bit complicated – and dry – so if you have ISOs you should probably talk to your tax person My opinion on ISOs is essentially that for some middle ground between "few enough ISOs that you don't trigger AMT" and "so many ISOs that the potential tax savings are more than big enough to pay for a financial professional", it's not worth it to try and exercise ISOs early. AMT on ISOs will complicate your taxes for years to come: in some circumstances, you can recover some of the money you paid as AMT on the ISOs in future years -- essentially, ISO bargain element is a specific category of AMT-taxable income which gives you an AMT credit for future years, which you can recover with form 8801 [4]. For several years after my ISO exercise, I was able to eat away that credit by paying the AMT tax amount when it was _lower_ than my standard income tax. 1. https://taxfoundation.org/2022-tax-brackets/ 2. https://www.nerdwallet.com/article/taxes/california-state-tax 3. https://smartasset.com/taxes/income-taxes#H3aXczXUcM 4. https://www.irs.gov/forms-pubs/about-form-8801

subsubzero 4y ago

I gave my Wife money to exercise her ISO's(startup before IPO) for her first 1.75 years of shares when the company valuation hadn't changed. Her company went public and the stock jumped and then crashed, I think the current price per share is lower than her exercise price so she is underwater and the money I gave her is worth less as shares vs. cash I originally gave her. Really a huge bummer as this job up-ended our life and she has absolutely nothing to show for 3 brutal years of hard work. I guess the only thing is wait it out and see if the shares recover.

edgefield 4y ago
This is the sunk cost fallacy. The best option might be to leave and find something else.
- s1artibartfast 4y ago
  They are talking about the shares, which are already fully owned and liquid. The question is to sell them and invest the cash somewhere better(??) or HODL.
  - refurb 4y ago
    It's a startup before IPO, so not liquid (unless the company offers to buy-back). This is a great reason to value options at $0 when taking an offer. It's a lottery and you shouldn't assume you'll see any money from then. If you do, it's all gravy.
    - s1artibartfast 4y ago
      You missed the part where they said they are now post IPO >Her company went public and the stock jumped and then crashed,
  - anonymousiam 4y ago
    Options are not shares -- they are an option to buy shares at a specified price.

nemo44x 4y ago

Right now you want to be vesting in a promising company that is well funded and has revenue streams coming in. We are in the early days of creating the new winners of the next bull market.

maerF0x0 4y ago

> If you leave the company, your options will expire if you don’t exercise them. Let me repeat that: if you leave the company, your options will expire if you don’t exercise them. The exact timeline of how quickly they expire depends on option type and company policy, but the termination window is commonly as short as 90 days. So, exercising your options enables you to actually own what you helped build. This is why I choose to not work for companies that do not have extended exercise windows -- and IMO neither should you. [1]: https://blog.samaltman.com/employee-equity#:~:text=2)%20Most%20employees,employee%20gets%20terminated https://blog.samaltman.com/employee-equity#:~:text=2)%20Most.... [2]: https://github.com/holman/extended-exercise-windows https://github.com/holman/extended-exercise-windows

lumost 4y ago
I only had options at one firm which was Series D and had ~300 employees. The company issued them at a price which was rich, then steadily issued new options at lower price points. The management made it a practice to have periodic calls which would talk about how they were 12-18 months away from IPO and the price target was going to be ~5x the rich price. Then there would be talks where engineering management would pitch fantasies about how stock pricing worked for IPOs. Meanwhile growth had stalled, and competition was getting stronger. I left all my options un-purchased. 6 years later when they had a Private Equity buyout I probably would have made somewhere between a -50% and 2x return (depending on liquidation preferences, subsequent issuance, and debt). At best.. I would have had an non-liquid 12% rate of return, losing out to the S&P500 over the last 6 years.
- dijonman2 4y ago
  Options are typically not profitable unless you win the lottery. I view them as a scam and RSUs are met with the same level of skepticism.
- sbierwagen 4y ago
  As you say when you mention liquidation preferences, I wouldn't be surprised if a PE buyout of a distressed company zeroed out employee equity.

jrdngonen 4y ago

I help work on Compound (https://withcompound.com/ https://withcompound.com/) (author of the essay also works at Compound). We help tech employees manage their finances and specialize in equity compensation. Our essay on equity and taxes may also be useful to those looking to better understand stock options: https://manual.withcompound.com/equity-guide-for-employees-at-fast-growing-companies https://manual.withcompound.com/equity-guide-for-employees-a...

redshirtrob 4y ago

This is a fine article. It covers a lot of the decisions one must consider when considering stock options. I just think it's a little abstract for folks who haven't lived the experience. I actually tried to enumerate the scenarios. When I hit five variables I realized the advice would be mostly worthless. That's 32 separate outcomes, some of which are pretty subjective, e.g. do I think this is a viable company? Nevertheless, I've been down this road a few times. I have some wins and losses. I think this article misses an important point: Exercising is not an all or nothing proposition. For example: If I join a startup and leave after a year, the difference between my strike price and the 409a price might be non-zero. I can still exercise a percentage of my options to avoid AMT. Maybe I can't exercise all of them without triggering AMT, but chances are I can exercise a fair amount. If I'm offered an early exercise, I don't have to do 100%. I can do a number that fits my budget. I just have to make sure I file my 83b election form.

known 4y ago

deleted 4y ago

[deleted]

dqpb 4y ago

If the answer isn’t “exercise them” why are you working at the company?

yardstick 4y ago
For the generous salary I would expect.
phendrenad2 4y ago
Dinosaurs won't hire me because I don't have a college degree. MAANGA won't hire me because I'm not good at leetcoding. That leaves startups.
- astrange 4y ago
  Fairly sure maybe half of MANGA knows what leetcode even is. I for one don't know what it is.
  - guessmyname 4y ago
    > Fairly sure maybe half of MANGA knows what leetcode even is. I for one don't know what it is. https://leetcode.com/ https://leetcode.com/ is a website famous for listing a repository of programming exercises that you can solve by implementing an algorithm categorized as Easy, Medium, or Hard depending on its complexity. Many technology companies, including, but not limited to, Facebook, Amazon, Apple, Netflix, and Google, (aka. FAANG) use the same type of problems during technical interviews to evaluate candidates’ problem solving skills.
  - kortilla 4y ago
    It’s how the interview process works for all swe hires and MANGA. You just don’t know it name.
    - astrange 4y ago
      I do interview people at a MANGA and think I know more about it than you do.

alfiedotwtf 4y ago

All these comments... Does anyone actually work at a company because they do interesting stuff, rather than option terms?

twicetwice 4y ago
I do interesting stuff in my free time. I make money in my work time. Not quite really—I do enjoy my work and my time at my job, and I would sacrifice some compensation to work at a more interesting/meaningful/fun company. I don't price the enjoyment of 50% of my waking hours at zero, of course. But my primary purpose in working a job is making money, and I don't think that's anything to be ashamed about. I want to buy a house one day.
- alfiedotwtf 4y ago
  Ok, that's a good take. To be honest, I've never thought about it like that. Thanks for the perspective.
deleted 4y ago
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jokethrowaway 4y ago
No, but occasionally you get something interesting at work. Very rarely. 99% it's all implement this API route or implement this react component. Waste of time, but pays well and will let you retire early.

todd3834 4y ago

I worked at a unicorn startup for about 1.5 years. It started to become clear to me that I probably wasn’t going to make a comparable income to what I was making before in a public company so I left. I exercised my shares. A year later they went public through a SPAC. the shares got a hair cut through the SPAC ratio. Total comp was still really bad but shares were locked up for 6 months or so (maybe longer I don’t remember). I couldn’t sell them and now that I can the total value is under $4,000. I paid over $1k exercising them which felt like an insane bargain. Maybe it will work out better for some of you though. I feel like if you are not extremely passionate about a startup and you are not one of the original founders… great place to learn and build your career but don’t think it will make you rich

DeathArrow 4y ago

I don't care about options. Let me see the money. Then I can buy shares in whatever company I want or invest in an index fund, managed fund or ETF.

goralph 4y ago
Options give us 'regular folk' exposure to private equity, which comes with potential for very high (& improbable) returns. As a salaried employee there's really no better vehicle for this kind of exposure. You'd need to start your own business, or play with leverage - which is dangerous. That said, the common adage of 'winning the startup lottery' is very true. The likelihood of actually (i) joining early enough, (ii) getting a reasonable grant, (iii) having market conditions work in your favour, (iv) the company growing exponentially for years, (v) you actually being able to stay the 3-4 years to vest enough options, and (vi) a liquidation event happening .... is quite low. Most, if not all, of these factors need to happen together.

jiveturkey 4y ago

directionally correct, but too many errors.

unicorn_eng 4y ago

I'm currently at a unicorn SaaS startup. I have 11,500 ISOs, about 7000 of which I've vested and exercised (I've got about 1.5 years left till I'm fully vested). My strike price is $1.50, which to me is a bargain, especially since there was a tender offer last year of around $14. There are ~70M outstanding shares. Other stats: $60M ARR, 120% NRR last year, almost 100% YoY growth during 2021, raised $110M at 40x revenue last year, high NPS, company still has over $110M in the bank, TAM is in the tens of billions, current market penetration is <5%, planning to go public at $200M ARR. So the potential upside is huge. Work environment is great, I have a great boss and a decently challenging/significant role. I'm a senior engineer making around $170k/year. I'm curious what you all think - is it worth the risk of staying until I vest? The alternative would be to join a public software company and increase my salary significantly (which would help so much right now - we need a larger house for our kids).

staplers 4y ago
You can do a lot more with liquid capital than options. Guaranteed money is worth more than maybe money, especially if you have a family. If you truly believe they're valuable, then invest when they ipo.
molsongolden 4y ago
Extremely simplified thought exercise with very rough possible #’s: Vesting 2,875 shares per year 2,875 @ $(14-1.50)= $36k/yr Assuming IPO @ $200MM ARR, public cloud SaaS benchmark rev multiple was roughly 20x last year before the crash. That’s a $4B valuation, ignoring dilution from here to there: $4B/70M shares = $57/share 2,875 @ $(57-1.5) = $160k/yr That’s assuming the market recovers to a similar level, ignoring further dilution, assuming the company continues executing and doesn’t hit unforeseen difficulties, etc. Can you make that much with less risk by changing jobs? - Another consideration might be diversification if your vested options represent a large % of your portfolio. - Another consideration, “work environment is great” isn’t something that everybody can say and this might be worth more than the raise.
- unicorn_eng 4y ago

victor9000 4y ago

Startup equity will always be worthless for 99.9% of people, and the second it's worth something more, it will be lawyered away from you. So from a business perspective, you should never work at a startup if you're not a founder. dvs: please convince me otherwise

andrewaylett 4y ago

It's perhaps worth noting that this the article is very US-centric. I'm in the UK, and I've never had an opportunity to exercise options that didn't come alongside an offer from the company to buy the shares. And in my experience, it's rare to exercise and hold. Even if you do, you can sell enough shares to cover the tax and keep the rest. My current employer has (and uses) the right to repurchase any shares I hold at the current "fair market value" if I leave the business. That's also fairly standard for privately-held companies, it seems.

lamontcg 4y ago

The big thing to avoid is exercising at a high price, paying all your taxes, then watching the shares plummet the next year, and eventually selling at a loss and winding up with only the maximum carryover cap gains loss every year after that. So the worst outcome is that your strike is $1.28 you exercise at $3.13 (costing you $80k + $40k in taxes or whatever -- it gets worse the better the stock is doing, which is one of many reasons why early exercise of options is risky but good) but you're stuck in a holding period while you go public, then when you exit that period you're at $0.50 or something like that, and you've passed over into a new tax year, and you have no cap gains to offset the losses on the stock. This happened to a lot of employees at dot com companies in the 2001 collapse.