Left company, exercise vested options or not?

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understandingJH
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Left company, exercise vested options or not?

Post by understandingJH » Fri Jul 06, 2018 2:11 pm

So I was laid off from a startup going through financial trouble (I was one of three let go on a nine person team, a couple others left as well on the other team as far as I know). It's a small company with 11-20 employees.

I have about 45% of my stock options vested. If exercised they would cost me about $1300 plus tax on any appreciation since grant (if any). I have a bit of time before they exercise right is forfeited to decide. When I negotiated compensation I negotiated for salary and not options, so I don't know what percentage equity these represent but knowing the exercise price I'd imagine it's a very tiny fraction of a percentage. There has been no further funding rounds since the grant (Series-A funded). The layoffs where I think in part to avoid raising Series-B funding and dilution.

So the expected value I can't calculate without knowing a) the value of the company, b) the percentage my shares represent, and c) the probability of a successful exit (for an employee -- I realize VCs and founders would have preferential options compared to my common stock). But let's say I did know these and let's say the hypothetical expected value was:

$10mm company valuation * 0.001 equity ratio share * 0.10 success probability = $1000. If this was the case, the expected value would be less than the cost of exercising. If so, would it make sense to exercise them? What other things should I consider?

On one hand the company is having financial trouble, it may be a bad deal even if the expected value was greater than exercise price. On the other hand it was part of my compensation, it represents very little risk in absolute terms (worst case I lose $1300 investment + tax on any appreciation -- and I doubt the appreciation is great if at all).

Sounds like buying a bunch of scratch off lottery tickets, with perhaps better expected value than lottery tickets?

ridebikeseveryday
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Re: Left company, exercise vested options or not?

Post by ridebikeseveryday » Fri Jul 06, 2018 2:27 pm

Dan Luu has a great writeup of the multitude of ways you can get screwed on options: https://danluu.com/startup-options/

Best of luck with your decision.

understandingJH
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Re: Left company, exercise vested options or not?

Post by understandingJH » Fri Jul 06, 2018 2:34 pm

ridebikeseveryday wrote:
Fri Jul 06, 2018 2:27 pm
Dan Luu has a great writeup of the multitude of ways you can get screwed on options: https://danluu.com/startup-options/

Best of luck with your decision.
I think I read that link or a similar analysis ~3 years ago when I started working at my ex-employer. Thanks, I'll take a look.

It's why I pushed hard for salary. In fact, at my current new job offer, I negotiated from 15% below market pay + equity to exactly market salary with no equity. I view options as worth less than nothing, nothing, slightly more than nothing, or stratospheric if the company becomes the next Apple (but the odds of that are lower than the Mariana Trench).

mountain-lion
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Re: Left company, exercise vested options or not?

Post by mountain-lion » Fri Jul 06, 2018 3:58 pm

I had a similar situation a few years ago: leaving the company and had to decide what to do.

I think it comes down to what $1,300 is worth to you, which is to say, what is the opportunity cost?

If that much isn't too far out into "luxury good" territory--which is to say, if you could lose it without it being too painful--I would say do it.

If you can, say, spend that much on a vacation, or a new guitar, or new watch, or whatever, without it being too painful then this could fall into the same category: A consumptive good that probably isn't worth the cash value after you spend it, but might give you sufficient pleasure as to be worth it.

But you have to be OK not having the money any more. That may or may not be your own situation.

In my case, I bought about half the stock available to me, which turned out to be a good thing, because the company got purchased a couple of years later and I made a good amount of money. But that happened really unexpectedly, and until that point I had just written it off as a bit of a lark, and I never really expected it to go very far.

Since then, I have generally kept a small amount of "fun-money" in my portfolio. I don't really depend on this money for anything but amusement. Some guys golf; I pick stocks--neither is a money maker, really--and as long as you don't expect it to be, no harm done.

But all this, again, depends on your own risk tolerance and how you would spend the money otherwise.

nasrullah
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Re: Left company, exercise vested options or not?

Post by nasrullah » Fri Jul 06, 2018 4:06 pm

understandingJH wrote:
Fri Jul 06, 2018 2:11 pm
So I was laid off from a startup going through financial trouble
More than likely the startup is worth $0 at this point, also likely is that the startup will cease to exist in a short amount of time. The opposite side of this is IF they get their act together, and get to the point where you could actually do something with your shares they would likely be worth 1000x what you have today.

If it's worth the risk to you, execute your shares, just know that the odds are extremely high they are worthless.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

dcabler
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Re: Left company, exercise vested options or not?

Post by dcabler » Fri Jul 06, 2018 4:13 pm

nasrullah wrote:
Fri Jul 06, 2018 4:06 pm
understandingJH wrote:
Fri Jul 06, 2018 2:11 pm
So I was laid off from a startup going through financial trouble
More than likely the startup is worth $0 at this point, also likely is that the startup will cease to exist in a short amount of time. The opposite side of this is IF they get their act together, and get to the point where you could actually do something with your shares they would likely be worth 1000x what you have today.

If it's worth the risk to you, execute your shares, just know that the odds are extremely high they are worthless.
+1 One thing to check is whether your options have "first right of refusal". Many startups have this. Basically it means, yeah, you can exercise your options and before your check even clears, they write a new check purchasing them back.

I've done a couple of startups. Unless I'm a principal, never again...

understandingJH
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Re: Left company, exercise vested options or not?

Post by understandingJH » Fri Jul 06, 2018 4:49 pm

dcabler wrote:
Fri Jul 06, 2018 4:13 pm
+1 One thing to check is whether your options have "first right of refusal". Many startups have this. Basically it means, yeah, you can exercise your options and before your check even clears, they write a new check purchasing them back.

I've done a couple of startups. Unless I'm a principal, never again...
I checked the contract, and there is no mention of "first right of refusal" or such language, and it turns out that there is an amendment at the end that changed the vesting schedule before I started. So I likely have 58% vested not 45%.

understandingJH
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Re: Left company, exercise vested options or not?

Post by understandingJH » Fri Jul 06, 2018 4:58 pm

nasrullah wrote:
Fri Jul 06, 2018 4:06 pm
understandingJH wrote:
Fri Jul 06, 2018 2:11 pm
So I was laid off from a startup going through financial trouble
More than likely the startup is worth $0 at this point, also likely is that the startup will cease to exist in a short amount of time. The opposite side of this is IF they get their act together, and get to the point where you could actually do something with your shares they would likely be worth 1000x what you have today.

If it's worth the risk to you, execute your shares, just know that the odds are extremely high they are worthless.
Edited for privacy:

I also doubt 1000x (1.3mm -- $1300 x 1k) is remotely possible. I really doubt that upside risk of the options could be worth that much. I estimate (and could be wrong) that my options might be worth something like 0.05% equity. To get to 1000x from my exercise price, the company would have to have an exit of 1,300,000 / 0.0005 = 2.6 billion (or more since these are not preferred shares plus possible future dilution.) This seems unlikely.

For $5 in some states you can buy a scratch off lottery ticket that has the odds of winning 1mm to be 1 out of 3,000,000. $1300 / $5 can buy 260 such tickets reducing the odds to 1:11,500. I'm unsure which one is more likely.
Last edited by understandingJH on Fri Jul 06, 2018 5:20 pm, edited 6 times in total.

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Tamarind
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Re: Left company, exercise vested options or not?

Post by Tamarind » Fri Jul 06, 2018 5:03 pm

I just went through this process a couple of months ago, though my decision was for a bit more money. I was on good terms with the CFO so was able to get all the information I needed to calculate value...... It didn't really help me make the decision.

Feel free to PM me if you want to chat in greater detail, but the short version is that unless you have knowledge that an exit is imminent at a good valuation, you should only exercise for as much money as you'd be willing to set on fire. :beer

ETA that as I am posting I see you just posted some more detailed info about their financials and your equity math. I strongly advise you edit your post to remove that ASAP. I would bet that you signed a nondisclosure as party of qualifying for the options. Posting financial info here counts as public disclosure and is not worth it.

understandingJH
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Re: Left company, exercise vested options or not?

Post by understandingJH » Fri Jul 06, 2018 5:11 pm

Tamarind wrote:
Fri Jul 06, 2018 5:03 pm
ETA that as I am posting I see you just posted some more detailed info about their financials and your equity math. I strongly advise you edit your post to remove that ASAP. I would bet that you signed a nondisclosure as party of qualifying for the options. Posting financial info here counts as public disclosure and is not worth it.
I updated that post and removed details that could be problematic. Let me know if I did enough. It's hard to talk about these things without numbers though.

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Tamarind
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Re: Left company, exercise vested options or not?

Post by Tamarind » Fri Jul 06, 2018 5:22 pm

understandingJH wrote:
Fri Jul 06, 2018 5:11 pm
Tamarind wrote:
Fri Jul 06, 2018 5:03 pm
ETA that as I am posting I see you just posted some more detailed info about their financials and your equity math. I strongly advise you edit your post to remove that ASAP. I would bet that you signed a nondisclosure as party of qualifying for the options. Posting financial info here counts as public disclosure and is not worth it.
I updated that post and removed details that could be problematic. Let me know if I did enough. It's hard to talk about these things without numbers though.
It's definitely enough. I know what you mean about it being hard to talk without numbers. You certainly can post info on how much you think your chunk of options is worth relative to what it would cost you to purchase them, just don't show your math in a way that discloses numerical info on the whole company's equity pool size, current valuation, or financials like revenue or cash flow.

carolinaman
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Re: Left company, exercise vested options or not?

Post by carolinaman » Sat Jul 07, 2018 8:36 am

I left a startup company with VC funding in 1980s. I had vested options and chose not to exercise them because I saw no way for the company to succeed with executive management and their fixation on fatally flawed software products.. This was a tech company with over 300 employees with offices in 5 cities but most activity was from the main office where I worked. I was Sr VP over professional services which provided most of the revenue and was very profitable. However, the software group and the company overall was losing money. I met with out bankers every month to review our sales forecast. I felt that if we failed to meet our sales forecast or they were to drop significantly, we were in real danger of losing our credit line which would lead to bankruptcy unless other funding could be found.

About a year after I left, the company bought a couple of other tech companies using VC funds. Soon thereafter, they did an IPO. The stock quickly went to $20+ per share. My options would have cost me $2 per share. I only had options for 1800 shares, so it would not have been a huge loss if I had exercised them and the company went bankrupt.

The lesson learned for me was to never underestimate the resourcefulness of VC firms to do things that enable the company to look attractive and go public. The company was only public for a few years and no longer exists. Some parts were sold to other companies and others just folded. It was very sad to me because if the company had been properly focused on its business it could have been a long term success. Instead the focus became how can we go public.

It is not going to make or break you to exercise your options. If it were me, for that small investment I would exercise the options unless you are convinced this company cannot be successful.

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