A couple years ago, this one 28 year old woman I knew left a Series B funded company after two years for a higher salary at a large financial institution. At the time, I thought she was crazy because her startup was clearly going places. After a year of consulting at one firm, I was fortunate enough to be granted some options after asking the CEO whether that was a possibility. But remember, I was a contractor who worked part-time.
Imagine how many more options full-time employees get after a similar duration of work? The reasons against buying your options are basically the opposite of all the above.
But the main two reasons for not buying are as follows:. Meanwhile, Netflix stock is liquid and Uber stock is not. There are many more examples where the difference in median salaries is even larger e. The general rule of only having 90 days in order to buy your options seems quite restrictive. I like the idea of building a diversified portfolio of private company stock just like a VC. All it takes is one to do really well. One of the best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital.
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Personal Capital is free, and less than one minute to sign up. For me, it would be whether I believed in the future success of the company.
The bulk of most option grants are given in the beginning. Hopefully management tops up those they want to keep. But for The most part, you get the most bang for your buck by working for 3 to 4 years and then leaving to get the next big option grant.
You always get the most money, both grants and salary, by moving. Plus once you leave, you have an even less useful view of the company. Great postů with a lot to think about. However, as Jim Wang in the comments and you in the article point out, your judgement of the company may be clouded by having worked there. Also, pre-IPO startups these days perform reverse-splits and a lot of other accounting techniques to get more value to the VCs and investment bankers and away from the common employee option holders, so you still may make a return, but baggers are pretty rare anymore.
You hit on a really good point that established companies are more lucrative than startups. At that point, the company is still giving out options to new hires, and you have a few years to decide how the company is doing before you have to make a decision on whether you want to exercise your options or not and you usually can do a same-day sale because the company is public. Interesting viewpoint on the best time to join a company is after the IPO. Hopefully the company is paying close to market salaries by then.
But experience I had was that once my company when IPO, there was a lot of managers who started to slack off, and there was a lot of dissension among those who struck it rich and the relatively new were people who still had to put in their dues. Compared to that, the relatively small amount of money it will cost you to see what happens is worth the wild ride.
Good point about the strick prices on options being discounted to the recent valuation anyway, and there could be more discount for employees. Exiting is the big X factor. Personally, I think it comes down to trust. How much do your trust your own ability to accurately evaluate the potential of your company when you leave?
How much do you trust that company to treat private investors like you? Some companies operate honorably. Some companies are known to bend every rule to the breaking point to avoid giving anyone any money at all, ever.
As an inconsequential investor in a private company, you have almost no insight into the company, and little practical recourse, should they decide to cheat you. But hopefully, as an employee of the private company, you have great insight into the numbers.
It really depends on how much I believe in the company and how much liquidity I have. I can see it from your perspective as a contractor, though. Diversifying by individually picking stocks is still close to gambling at the end of the day, so I agree with you: RSUs are a different matter, you have no choice but to take them.
I blogged here on why RSUs need to be sold as soon as you get them:. I left a start-up after working there for 5 years. At the time of my leaving I knew the company needed to pivot and re-structure.
He would probably kick yourself if the company is doing well and the turned into 30, For every dollar of private shares purchased, an equivalent value of options was issued with 3-year terms. The first set of options expire next August, then some in September, and more in July We expect that by then, there will be some serious progress on revenue growth the company makes a product due to some major new distribution channels that are opening up.
It is very possible that the value of the options will well-exceed the purchase price by the time they expire, which will make the choice pretty easy. If all goes well the company could have huge growth and would be a likely acquisition target at many times the current valuation.
I should clarify, I have stock warrants not options. So, a great deal as it turned out. A good problem to have! As this article rightly notes, even if the options pay off in the money there is little chance it will make up for the lower salary. And the bottom line is, the difference between acquiring the options or not is not whatever the gain might have been. Her options would be worth 3x so far if she bought, and maybe 6x by bc I know the company is raising at an even higher valuation successfully.
A big issue is folks just not being able to buy their options when they leave, for whatever reason. I think it definitely depends on your views of the company and where you think the company is heading but like you said, a lot of it probably has to do with what it costs to make the purchase. Was really awesome and I got lucky for sure. I can sell, i am fully vested however I am choosing not to sell.
I still work at this company and I like the way its heading so I believe that it will continue going up. At some point im sure ill cash out and possibly buy more rental properties but for now im letting it grow.
Unless you are really sure that the company is going to fail, I think you should always buy as much options as possible. Like you said, see it as being your own one-man VC. With the below average salary they pay at startups this is the only way to compensate. Calculating the expected value with my assumptions on exit timing and valuations yields a nice return. It depends on how the options documents are written.
It is a lot of money for many people and paying taxes on private investment is a huge gamble. Your email address will not be published.
Don't subscribe All Replies to my comments Notify me of followup comments via e-mail. You can also subscribe without commenting. If you were willing to give up at least a year of your life making a below market salary, then you should absolutely be willing to buy your options when you leave. What if you passed on buying your options, and the options then turned out to be a 10 bagger?
You would probably never forgive yourself for making such a bad financial move. It would be like passing to work at Facebook when the firm still had less than 1, employees.
You might literally cry yourself to sleep every night! After 10 years, you might be able to build a portfolio of positions in startups much like a Venture Capitalist would.
Reasonable Percent Of Your Portfolio. High Certainty Of Growth. Startups are usually loss making. You should know better than most how well your company is doing. An Increasing Amount Of Acquisitions. If you see competitors getting gobbled up by larger companies, your company might be next if its in healthy operating condition. I promise you that big fish are always analyzing whether to acquire smaller fish or grow from within.
Companies of this size usually give RSUs vs. RSUs are basically stock grants given to you at various anniversary dates.
You must consider three tax rates: If you are early in the company, can afford to exercise, believe in your company, and hold on for at least one year, then you can pay the lower LT capital gains tax rate.
But the main two reasons for not buying are as follows: You generally have 90 days once you leave the company to buy your options.
If the choice is between buying an option lottery ticket or paying your rent or your student debt, then you probably will have to pass on buying your options unless you can get a nice loan from your parents. Is your retirement on track?More...