Help with private stock options!

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financeidiot
Posts: 169
Joined: Sat Dec 24, 2016 12:10 pm

Help with private stock options!

Post by financeidiot » Wed May 16, 2018 11:26 am

Hi, all! I appreciate your help and insights in advance!

I've changed employment and moved to a startup where I work as a contractor with a guaranteed salary of $120k for 1 year. That startup has now purchased and merged with another company. I know at some point in the next two weeks, I will be presented with three options and must select one of the following:
1. Stay a contractor with my current salary through the duration of my 1 year contract ($120k per year). Nothing changes, I continue to work for my contracting company, and we evaluate continued employment at the new company at the end of the year.
2. Become an employee of the new company with the same salary ($120k per year). There will be no issues leaving my current contractor company to work for this employer.
3. Become an employee of the new company with a lower salary according to some kind of sliding scale of salary for equity (most likely stock options).

I believe the new company has tremendous growth and loss potential (high risk, high reward). However, I've never owned part of a private business before, nor have I ever been offered or evaluated the worth of stock options.

About me: I'm single, rent, live with my girlfriend, current annual spending is around $40,000, $175k in assets saved via 401ks, Roth IRA, and taxable accounts (85/15 stock/bond allocation). The longest I've stayed with one employer is 2.5 years due to job hopping. I believe I have a high capacity for risk and that I can afford to lose some of my salary in the event the stock options go to zero. The idea of foregoing a large amount of guaranteed salary for something I could lose if I'm fired is a bit scary to me (never been fired, but don't want to get hit by a double whammy). The idea of not going to a better job because of stock option vesting is also a bit scary to me.

I'm putting to the group the following questions:
1. What information is necessary to make this decision? What should I request from the company to make a decision?
2. Who should I involve in this process to make sure I'm not being taken advantage ofl? An employment lawyer?
3. What is a reasonable limit on the amount of salary to forego in exchange for stock options at a high risk company?
4. What is a reasonable limit on the allocation I can allow for an illiquid high risk asset? 10%?
5. What should I do with my other investments to compensate for adding an illiquid asset?
6. Are there any questions I should be asking that I'm not?

My current inclination is to do the following:
1. Request a current valuation of the company, what % of company total stock my options would represent, and contract in writing for review.
2. Review the contract, vesting schedule, etc. with an employment lawyer in my state and my father (he's done this before) before signing to ensure I understand what I'm doing.
3. If the valuation seems reasonable and the contract check out, become an employee of the new company and accept no more than a 10% lower salary ($108,000 per year, $12,000 per year discount) in exchange for stock options (depending on the valuation of the stock).
4. Treat stock options as if they're worth $0 for planning purposes until the company is sold or goes public.
5. Decrease my stock/bond allocation to 80/20 (or more?) from 85/15 to compensate for additional risk.

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