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Many if not most publicly-traded companies explicitly prohibit their employees from hedging out their risk in this fashion. Check the fine print of your employ

Many if not most publicly-traded companies explicitly prohibit their employees from hedging out their risk in this fashion. Check the fine print of your employee handbook before doing it. And if you are a section 16 employee, you should already know that you are almost certainly prohibited from doing it. What, did you think you were the first to think of this?

JesperRavn 11y ago
In addition to rules set by the company, selling short the company you work for (or doing the equivalent with options) is a legal grey area. The best advice is simply to sell as early as possible (note, this is not financial advice).
- fredkbloggs 11y ago
  Only as gray as the definition of "material nonpublic information", which has a much stricter legal definition than the plain-language meaning would imply. Always consult qualified counsel, of course. But in general the best advice is not to accept equity as compensation for services. Anyone who cannot compensate you in cash is by definition desperate.
  - JesperRavn 11y ago
    In a lot of big tech companies, stock is a big part of compensation. This is usually in the form of Restricted Stock Units (RSUs) [0], which are just stock which you receive at various vesting dates. I don't know why companies choose to pay compensation in this way (instead of cash). Maybe because it's easier to write the contract that way (an RSU grant is a contract) than to write the equivalent contract for cash compensation. I suspect there is no good reason at all for this. But the important thing is that during salary negotiation, asking for everything in cash is not an option. So actually turning down equity based compensation (at least in this case, I'm not commenting on pre-IPO situations) is extremely bad advice. Equity should be discounted because of the risk, but RSUs are worth real money and should be treated as such. [0] https://www.linkedin.com/pulse/20140918211244-22433455-your-restricted-stock-unit-questions-answered https://www.linkedin.com/pulse/20140918211244-22433455-your-...
    - fredkbloggs 11y ago
      I'm familiar with these instruments and with the custom. It is not sufficient to discount them for business risk or interest rate risk or any of the other common risks; they must also be discounted for concentration. Unless you were born into a large trust fund or have already accumulated vast wealth (and expect to work for only a short time more), the discounted present value of your expected future salary is going to be your largest asset. That asset is substantially dependent on the business and market fortunes of your employer; therefore, any further exposure to those fortunes represents additional excess concentration. Even if your downside exposure is limited, as it is with RSUs and options, that exposure must be devalued if it represents excess concentration. For most people, the proper devaluation is going to be 100%. You already have too much exposure to your employer. You want to lay off that exposure any way you can (as the author understands), not add more by accepting equity in lieu of cash. It's simply not correct that demanding cash is not an option. It's a business negotiation; anything is an option. You may not get all, or even any, of what you want, but categorically refusing to ask for it is seldom a winning strategy.
      - JesperRavn 11y ago
        I was with you up til >For most people, the proper devaluation is going to be 100%. The author argues, correctly, that exchanging stock for its current market value is a good deal. I agree (and I also agree with you that there is extra risk from having your own company's stock). But from none of this does it follow that we should discount stock units by 100%. That is like saying that an offer of $100 with 50/50 odds, would be worth 0, or would be worth zero if the coin toss was correlated with some life event. I think the problem with your reasoning is that you are treating risk as a concept of independent importance, while it is really a derived concept, with the fundamental concept being the utility from a probabilistic cash flow. >It's simply not correct that demanding cash is not an option. It's a business negotiation; anything is an option. You may not get all, or even any, of what you want, but categorically refusing to ask for it is seldom a winning strategy. Having been involved in these negotiations and seen people's salaries and stock grants (through legitimate means), I can say that trying to get more base salary is really hard, and not worth the time. Even if you got more salary, it would come at the cost of so much less stock that it wouldn't be worth it.
- serve_yay 11y ago
  The overall position is not short, though I don't know how much that matters in practice. Overall this is not about taking a bet against the company so I don't see an ethical problem with it, though again it could be in violation of agreements.
njs12345 11y ago
Even if hedging the risk directly is banned, you may be able to create a reasonable approximation by hedging shares of a near competitor. Apparently people in finance who get paid partly in options do this kind of thing all the time. Also, how would you ever get caught if you just ignored what it said in the handbook?
- fredkbloggs 11y ago
  > Also, how would you ever get caught if you just ignored what it said in the handbook? At this point, I assume that everything you do is known to everyone. It's unfortunate, but it's also the sensible assumption. Even if the law would seem to prevent them from discovering your actions, there's no reason to believe that law will actually protect you. At the very least, they can almost always fire you without any reason at all, so even the slightest suspicion is sufficient. They don't need to prove it in criminal court.
- foobarqux 11y ago
  You are also usually banned from trading in the stock of competitors.
  - yummyfajitas 11y ago
    So I've never actually seen one of these agreements, but supposing your stock is in an index, is it also forbidden to go short the index and long in stocks outside your sector? (I expect transaction costs would nuke this idea, but I'm somewhat curious how sophisticated big company employee agreements are.)
    - sokoloff 11y ago
      That's not covered by my current company's policy (and I don't recall seeing it in any of the other ones), but if you entered into such an arrangement, it would be plainly obvious what your intent was, and the fact that you didn't technically violate the company's agreement wouldn't be an excuse for the company's compliance department nor for the SEC. Short the index and long everything but your SECTOR is probably OK. That's just a bet against your sector. Short the index and long everything except your specific COMPANY is not going to be defensible. (In my policies, it's more straightforward to just short the sector directly, if such an instrument exists.)
blazespin 11y ago
I've never seen that at all. There are trading ban windows, sure, but nothing against trading in stock or options outside of them. I am sure for sales / executive that is different,
- sulam 11y ago
  I've seen this repeatedly. In specific instance, at my last company I was specifically prohibited against any hedging activities, even when I already owned the underlying position. This is quite common. The logic should be obvious: a hedge is at least partially a bet against the company's success.
  - fredkbloggs 11y ago
    The logic is not at all obvious. We are talking about large, publicly-traded corporations, and employees whose roles do not fall under section 16 guidelines. Their ability to influence the company's outcomes is somewhere between not material and nonexistent. Indeed, the law sees no reason to prohibit them from trading in their employers' securities. Why should they be prohibited from hedging their exposure? How are the shareholders harmed by this? It seems like an irrational response to a hypothetical fear, not sound logic. Especially since the only perfect hedge is found in a Japanese garden.
    - prostoalex 11y ago
      > Their ability to influence the company's outcomes It's not the outcome, it's access to material information. Anyone who has access to sales or revenue information can come to reasonable conclusions in regards to underperforming/overperforming come earnings time, and trade on that information.
      - fredkbloggs 11y ago
        If the information were material, then trading would be illegal. We're assuming these are people who can legally trade; i.e., those without access to material nonpublic information.
prostoalex 11y ago
This is an insider trading. Whenever you purchase equity/options on your employer outside of 10b5-1 program, the prosecution will assume you had some insider info to trade on. The onus is on you to prove that you didn't.
fsk 11y ago
Get a friend or relative to buy the puts for you.

JesperRavn 11y ago

In addition to rules set by the company, selling short the company you work for (or doing the equivalent with options) is a legal grey area. The best advice is simply to sell as early as possible (note, this is not financial advice).

fredkbloggs 11y ago
Only as gray as the definition of "material nonpublic information", which has a much stricter legal definition than the plain-language meaning would imply. Always consult qualified counsel, of course. But in general the best advice is not to accept equity as compensation for services. Anyone who cannot compensate you in cash is by definition desperate.
- JesperRavn 11y ago
  In a lot of big tech companies, stock is a big part of compensation. This is usually in the form of Restricted Stock Units (RSUs) [0], which are just stock which you receive at various vesting dates. I don't know why companies choose to pay compensation in this way (instead of cash). Maybe because it's easier to write the contract that way (an RSU grant is a contract) than to write the equivalent contract for cash compensation. I suspect there is no good reason at all for this. But the important thing is that during salary negotiation, asking for everything in cash is not an option. So actually turning down equity based compensation (at least in this case, I'm not commenting on pre-IPO situations) is extremely bad advice. Equity should be discounted because of the risk, but RSUs are worth real money and should be treated as such. [0] https://www.linkedin.com/pulse/20140918211244-22433455-your-restricted-stock-unit-questions-answered https://www.linkedin.com/pulse/20140918211244-22433455-your-...
  - fredkbloggs 11y ago
    I'm familiar with these instruments and with the custom. It is not sufficient to discount them for business risk or interest rate risk or any of the other common risks; they must also be discounted for concentration. Unless you were born into a large trust fund or have already accumulated vast wealth (and expect to work for only a short time more), the discounted present value of your expected future salary is going to be your largest asset. That asset is substantially dependent on the business and market fortunes of your employer; therefore, any further exposure to those fortunes represents additional excess concentration. Even if your downside exposure is limited, as it is with RSUs and options, that exposure must be devalued if it represents excess concentration. For most people, the proper devaluation is going to be 100%. You already have too much exposure to your employer. You want to lay off that exposure any way you can (as the author understands), not add more by accepting equity in lieu of cash. It's simply not correct that demanding cash is not an option. It's a business negotiation; anything is an option. You may not get all, or even any, of what you want, but categorically refusing to ask for it is seldom a winning strategy.
    - JesperRavn 11y ago
      I was with you up til >For most people, the proper devaluation is going to be 100%. The author argues, correctly, that exchanging stock for its current market value is a good deal. I agree (and I also agree with you that there is extra risk from having your own company's stock). But from none of this does it follow that we should discount stock units by 100%. That is like saying that an offer of $100 with 50/50 odds, would be worth 0, or would be worth zero if the coin toss was correlated with some life event. I think the problem with your reasoning is that you are treating risk as a concept of independent importance, while it is really a derived concept, with the fundamental concept being the utility from a probabilistic cash flow. >It's simply not correct that demanding cash is not an option. It's a business negotiation; anything is an option. You may not get all, or even any, of what you want, but categorically refusing to ask for it is seldom a winning strategy. Having been involved in these negotiations and seen people's salaries and stock grants (through legitimate means), I can say that trying to get more base salary is really hard, and not worth the time. Even if you got more salary, it would come at the cost of so much less stock that it wouldn't be worth it.
serve_yay 11y ago
The overall position is not short, though I don't know how much that matters in practice. Overall this is not about taking a bet against the company so I don't see an ethical problem with it, though again it could be in violation of agreements.

njs12345 11y ago

Even if hedging the risk directly is banned, you may be able to create a reasonable approximation by hedging shares of a near competitor. Apparently people in finance who get paid partly in options do this kind of thing all the time. Also, how would you ever get caught if you just ignored what it said in the handbook?

fredkbloggs 11y ago
> Also, how would you ever get caught if you just ignored what it said in the handbook? At this point, I assume that everything you do is known to everyone. It's unfortunate, but it's also the sensible assumption. Even if the law would seem to prevent them from discovering your actions, there's no reason to believe that law will actually protect you. At the very least, they can almost always fire you without any reason at all, so even the slightest suspicion is sufficient. They don't need to prove it in criminal court.
foobarqux 11y ago
You are also usually banned from trading in the stock of competitors.
- yummyfajitas 11y ago
  So I've never actually seen one of these agreements, but supposing your stock is in an index, is it also forbidden to go short the index and long in stocks outside your sector? (I expect transaction costs would nuke this idea, but I'm somewhat curious how sophisticated big company employee agreements are.)
  - sokoloff 11y ago
    That's not covered by my current company's policy (and I don't recall seeing it in any of the other ones), but if you entered into such an arrangement, it would be plainly obvious what your intent was, and the fact that you didn't technically violate the company's agreement wouldn't be an excuse for the company's compliance department nor for the SEC. Short the index and long everything but your SECTOR is probably OK. That's just a bet against your sector. Short the index and long everything except your specific COMPANY is not going to be defensible. (In my policies, it's more straightforward to just short the sector directly, if such an instrument exists.)

blazespin 11y ago

I've never seen that at all. There are trading ban windows, sure, but nothing against trading in stock or options outside of them. I am sure for sales / executive that is different,

sulam 11y ago
I've seen this repeatedly. In specific instance, at my last company I was specifically prohibited against any hedging activities, even when I already owned the underlying position. This is quite common. The logic should be obvious: a hedge is at least partially a bet against the company's success.
- fredkbloggs 11y ago
  The logic is not at all obvious. We are talking about large, publicly-traded corporations, and employees whose roles do not fall under section 16 guidelines. Their ability to influence the company's outcomes is somewhere between not material and nonexistent. Indeed, the law sees no reason to prohibit them from trading in their employers' securities. Why should they be prohibited from hedging their exposure? How are the shareholders harmed by this? It seems like an irrational response to a hypothetical fear, not sound logic. Especially since the only perfect hedge is found in a Japanese garden.
  - prostoalex 11y ago
    > Their ability to influence the company's outcomes It's not the outcome, it's access to material information. Anyone who has access to sales or revenue information can come to reasonable conclusions in regards to underperforming/overperforming come earnings time, and trade on that information.
    - fredkbloggs 11y ago
      If the information were material, then trading would be illegal. We're assuming these are people who can legally trade; i.e., those without access to material nonpublic information.

prostoalex 11y ago

This is an insider trading. Whenever you purchase equity/options on your employer outside of 10b5-1 program, the prosecution will assume you had some insider info to trade on. The onus is on you to prove that you didn't.

fsk 11y ago

Get a friend or relative to buy the puts for you.