Sell or keep shares of a private company?

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deanmoriarty
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Sell or keep shares of a private company?

Post by deanmoriarty » Fri Oct 06, 2017 4:39 pm

Hello,

I worked for a few years (left about a year ago) at a startup which is now valued $250M. I was an early employee with a significant share of common options, that I exercised upon leaving.

The company is overall on an upwards trajectory, and I think the business and the market opportunity they're after is still very strong, I know all the key people there as I periodically keep in touch with them. At the same time, it's still a startup, so risk is still significant.

I have been approached by a VC investor who would like to buy my portion of the shares, still illiquid, as a private transaction. They would be valuing my shares as if the company was worth $150M (due to the fact that I have common shares, whereas investors normally buy preferred, which have liquidation preferences and voting rights), so from such transaction my capital gain would be ~$1M (long term capital gain).

I don't desperately need liquidity, I have a stable job and my situation is:

Age: 30
State: CA
Net Worth: 600k (all invested in Vanguard)
Home: no home, I rent

Question is: should I accept the offer or let it ride? Realistically, this company still has enough gas in the tank to sell at a larger price or go IPO, in which case my shares would be treated as preferred so I'm potentially looking at a ~$5M value in maybe 4-5 years (again, purely speculative), which would be life changing.

Thanks!

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Strayshot
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Re: Sell or keep shares of a private company?

Post by Strayshot » Fri Oct 06, 2017 4:50 pm

If I had an opportunity to more than double the total value of my investments at such a young age I would do it in a heartbeat.
You are trading something worth "nothing" with the potential to be worth "something" for a concrete and meaningful amount of money.

My opinion is do it.

deanmoriarty
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Re: Sell or keep shares of a private company?

Post by deanmoriarty » Fri Oct 06, 2017 4:52 pm

Strayshot wrote:
Fri Oct 06, 2017 4:50 pm
If I had an opportunity to more than double the total value of my investments at such a young age I would do it in a heartbeat.
You are trading something worth "nothing" with the potential to be worth "something" for a concrete and meaningful amount of money.

My opinion is do it.
Thanks for your opinion. Keep in mind that "more than double" is really just "double", since $1M is the gross proceeding. Being in California I estimate a ~35% tax on that, so net would be ~$600k, which would hardly improve my life (I am quite frugal and aggressive saver and my total comp is now $350K, so I'm able to save much more per year than I used to, so the 600k NW should grow fast even if I don't sell those shares), especially after all the energy I put for working in that startup for those years.

Thanks.

alex_686
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Re: Sell or keep shares of a private company?

Post by alex_686 » Fri Oct 06, 2017 4:57 pm

You, like almost everybody else, is putting the cart before the horse.

First, figure out your goals - from emergency fund to retirement. Then figure out your risk tolerance - both ability and willingness to take risks. Then figure out what your current assets are, including your human capital - i.e.what your expected income will be. Then figure out what your optimal asset allocation is.

Once you do that the answer should click into place. Stating that your old firm has excellent prospects is meaninglessness unless it is put in context or risk adjusted return. Talking about risk-adjusted returns is meaningless until you can put it into context of the ability to meet your goals.

Let the gamble ride and double your money? Maybe, but a bird in hand is worth 2 in the bush. Can afford to loose the 1m? Sell now and regret that you failed to hope on the train to easy town so you can retire in 10 years? Can't say. Figure out the big picture and I think things will snap into place.

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Strayshot
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Re: Sell or keep shares of a private company?

Post by Strayshot » Fri Oct 06, 2017 5:02 pm

Agreed, you said "net worth" so I figured there was a car and some possessions valued in your current $600K and figured your after tax would be ~$700K not realizing you are almost in the highest bracket already (assuming the $350K is all W2).
This is probably a tech company, and I am guessing there will be a reckoning for tech companies in the near-term so that skews my opinion, but I would still do it. It is a large gamble to take for a meaningful sum.
If you already had $10M, my opinion would be dramatically different.

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CaliJim
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Re: Sell or keep shares of a private company?

Post by CaliJim » Fri Oct 06, 2017 5:02 pm

"whereas investors normally buy preferred", "which have liquidation preferences and voting rights"
Liquidation: yes. Voting Rights: no. www.investopedia.com/terms/p/preferredstock.asp

Plenty of VC's buy common shares. They want to vote.

Anyway - for sure diversify - but split the difference.... and have clear (written, documented) data on why you think it is valued at $250m... and counter their proposal with a $200m valuation.

And hold on to a few shares to minimize future regret!

Depending on a lotta things..... don't concentrate investments too much... holding no more than 5% to 10% of your total NW in any one asset, and holding no less than 50 to 100 different stocks (ie: index funds) ... is probably a good idea.

You've done well and won at Risk.
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steadyeddy
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Re: Sell or keep shares of a private company?

Post by steadyeddy » Fri Oct 06, 2017 5:07 pm

It sounds to me like you're more interested in a potential home run than a definite double, and there's nothing wrong with that. Personally, I'd take the double and diversify. You can grow that buyout into something sizable with FAR less risk.

deanmoriarty
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Re: Sell or keep shares of a private company?

Post by deanmoriarty » Fri Oct 06, 2017 5:25 pm

Thanks everyone for the replies so far, it's always interesting to hear the different opinions of this forum.

Admittedly I think I have a high tolerance for risk when I think I have some sort of "advantage", especially in my career. For example, a few years ago, while all my coworkers (including me) were making $~100k at a large but "old" company with good benefits, I left and joined this startup very early because I believed that what I was going to learn skill-wise would prove super valuable for my career, even if that meant a huge paycut at the time that my coworkers couldn't understand (at that time I saved up about 4 years of living expenses, so it was not a terribly irresponsible move from my point of view).

I probably just got lucky, but by working hard and sucking all that knowledge from a very innovative field, I now am a highly sought after employee in the Silicon Valley and am pulling a respectable $350k a year with those acquired skills, whereas my previous coworkers are still making those ~100k normalized with 3% raises and they couldn't command this level of compensation. And I also have this equity.

Could it have gone much worse? Honestly, I fail to see how, because the things I learned would have made me far more valuable even if the company went belly up and the equity disappeared.

So I'm trying to apply the same philosophy here and, since I am realistically able to save 150k a year after-tax (I'm still single so no big expenses), what difference does 600k really make overall? In other words, I think the regret of losing this 1M (which is not life changing) would be less significant than the regret of seeing the equity worth 5M in 4 years (which would be life changing). If we were talking about 4M now vs 20M 5 years from now, things would be completely different.

However, this reality check on the forum is very useful as it is putting things in perspective, and I'm grateful for that.

Thanks again!
Last edited by deanmoriarty on Fri Oct 06, 2017 5:37 pm, edited 4 times in total.

staythecourse
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Re: Sell or keep shares of a private company?

Post by staythecourse » Fri Oct 06, 2017 5:29 pm

Boy, I would love to hear some expert opinions on this one.

If I was single, no mortgage, no dependents, and already had 600k (indicating I was FAR more responsible then most my age) I would hold onto the shares. Best case scenario it would be worth MULTI- MILLIONS enough to retire early, i.e. life altering money or it ends up being worth nothing which is not a big deal as you have a lot of human capital on your side and are already much ahead of the curve.

I remember reading a part of Intelligent Investor that most don't quote about the issue of producing great wealth from a startup business. He said most don't succeed as the company often struggles for the first 7 some years. During that time most bail out. The only ones who don't are usually family and close friends who keep the shares out of loyalty to the founders not because of business reasons. This is EXACTLY what played out in my wife's family. She has an uncle who is a billionaire and the only ones who held onto the original shares were the brothers and 1st degree family. They will even admit they thought money was a sunk cost and just assumed they would never see a dime of profit.

Good luck.
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psteinx
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Re: Sell or keep shares of a private company?

Post by psteinx » Fri Oct 06, 2017 5:38 pm

So you're making $350K now, have $600K aside from these shares, and the shares are currently worth perhaps $1.6M (at a $250M valuation, with perhaps a very slight markdown for less favorable liquidation preferences), but VC has offered $1.0M.

And your expenses are low.

The good news is, you're in quite good shape for your age, and likely to remain so, whichever option you choose.

Are you sure the relevant taxes would be ~35%? I know there's state taxes on top of federal, but still. Would these shares be taxed at long term rates? Is the basis near zero?

I would think there might be a little bit of room to negotiate the price upward with the VC firm. A 40% haircut is pretty big.

deanmoriarty
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Re: Sell or keep shares of a private company?

Post by deanmoriarty » Fri Oct 06, 2017 5:44 pm

psteinx wrote:
Fri Oct 06, 2017 5:38 pm
So you're making $350K now, have $600K aside from these shares, and the shares are currently worth perhaps $1.6M (at a $250M valuation, with perhaps a very slight markdown for less favorable liquidation preferences), but VC has offered $1.0M.

And your expenses are low.

The good news is, you're in quite good shape for your age, and likely to remain so, whichever option you choose.

Are you sure the relevant taxes would be ~35%? I know there's state taxes on top of federal, but still. Would these shares be taxed at long term rates? Is the basis near zero?

I would think there might be a little bit of room to negotiate the price upward with the VC firm. A 40% haircut is pretty big.
Thanks for your opinion.

Yes, taxes would be like that. My cost basis is essentially zero and in CA there's no difference between long and short term, so all simulations give me a ~35-37%.

And I've tried to negotiate a bit but VCs are firm, they explained to me that common don't have liquidation preference, which is what really is used when giving such large valuations (in other words, just because investors buy 10M of a 100M valued company, it doesn't mean they would actually buy the entire 100M if they had the possibility, because the risk of recouping the initial investment, even with the liquidation preference, would be much higher -- it's essentially a "trick" used to inflate valuations), so that's their best offer, and I am free to do my own calculation and refuse if I don't consider the offer fair.

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Re: Sell or keep shares of a private company?

Post by onthecusp » Fri Oct 06, 2017 5:54 pm

There are a few moving parts here, that's for sure. Just commenting on the valuation and offer.

It seems that either the valuation is "optimistic" or the offer is low ball. The VC didn't challenge the valuation, who knows why, and gave you a "reason" for their offer. I think the reason is just a negotiating tactic. Versus the valuation, maybe it is not worth full price to them, maybe they see more risk, maybe they can do better elsewhere, or maybe they think it is really worth more than the valuation and they can simply get it cheap from you because they are currently the only offer.

Right now all you know is that it is worth at least $1 million. You and they think it will be worth more in the future (of course they get to spread the risk out on many investments / speculations). :sharebeer

You can get more information, maybe a higher offer, and still not make a final decision. Don't counter, if they say yes it is then kind of hard to back out. Just respond with something along the lines of what you told us. You don't need the money today. You could also look for alternate VC and shop it around. If you get a higher offer then think about a counter offer, but without other bidders you are in the dark playing against people who do this all the time.

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CaliJim
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Re: Sell or keep shares of a private company?

Post by CaliJim » Fri Oct 06, 2017 6:19 pm

The VC probably has a maximum amount of money they are willing to invest here, and a target for % ownership.

They have the advantage in that they are in contact with current stock holders and you are not. And they may or may not need your shares to reach their target.

If you want more $ for your shares (I would) you need to have a really good case for your valuation, and publish among other stock holders who might be selling!

You should counter their liquidation value BS.

There is a reason they are trying to get voting shares.

There is a reason they are not buying new shares from the company
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Dottie57
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Re: Sell or keep shares of a private company?

Post by Dottie57 » Fri Oct 06, 2017 6:45 pm

Why hold onto your past? You've moved on from the company.

Take the money while it is offered. Not terribly liquid.

sixty40
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Re: Sell or keep shares of a private company?

Post by sixty40 » Fri Oct 06, 2017 7:10 pm

So the base is $1.0M, the upside is $5.0M, and is the realistic downside $0 (or higher)? I would look at the potential upside and potential downside as a matter of percentage. If upside is 50% and downside is 10%, I would hold onto it. If upside is 10% and downside is 50%, I would take the $1.0M. Only you know the percentages.

Making $350k/yr, the $1.0M in CA after taxes is about (38%+12%) $500k, I may just hold onto it if the upside is decent.

Let's play the Price is Right (I think that was the show), If someone offered you $1.0M now, or you can trade that to pick one of 3 doors with 2 doors having $0 and 1 door having $5.0M, what would you do? Whatever you pick, how may more or less doors will it take to change your mind?

To me it is a matter of percentages and risk.

deanmoriarty
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Re: Sell or keep shares of a private company?

Post by deanmoriarty » Fri Oct 06, 2017 8:02 pm

sixty40 wrote:
Fri Oct 06, 2017 7:10 pm
So the base is $1.0M, the upside is $5.0M, and is the realistic downside $0 (or higher)? I would look at the potential upside and potential downside as a matter of percentage. If upside is 50% and downside is 10%, I would hold onto it. If upside is 10% and downside is 50%, I would take the $1.0M. Only you know the percentages.

Making $350k/yr, the $1.0M in CA after taxes is about (38%+12%) $500k, I may just hold onto it if the upside is decent.

Let's play the Price is Right (I think that was the show), If someone offered you $1.0M now, or you can trade that to pick one of 3 doors with 2 doors having $0 and 1 door having $5.0M, what would you do? Whatever you pick, how may more or less doors will it take to change your mind?

To me it is a matter of percentages and risk.
Good points. A couple things:

- Downside is essentially $0. I spent about $20k to exercise those options, in the grand scheme of things is negligible
- Not sure about your tax calculation: selling shares is long term capital gain, so why 38%+12%? My math is more like 23%+13%

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Re: Sell or keep shares of a private company?

Post by Boglegrappler » Fri Oct 06, 2017 8:28 pm

If you can't stand the idea of passing up the cash, I'd urge you to sell only half of your stake. My guess is that your buyer would balk at that. But the fact that you have an offer has "informational content". Someone with investment expertise believes your shares are worth at least what they've offered.

You only have 20k invested. You're doing fine in your career and the ability to acquire founders stock, which is essentially what you own, isn't available to most people.

I wouldn't sell any. Half at most, if you can't resist taking some money off the table. Your analysis of the liquidation preference is completely missing the point. If the VC thought his liquidation preference really had any value, he wouldn't offer you anything. He wants your shares because of the upside, and if he's willing to put up more cash than he already has invested, he's got some confidence that he's right. He might even "know" something that you don't about future prospects or transactions for the company. I repeat....in your position, I wouldn't sell any. Good luck.

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Re: Sell or keep shares of a private company?

Post by Stormbringer » Sat Oct 07, 2017 9:17 am

Venture capitalists aren't known for their generosity. If they are offering you $1M it is because they believe it is worth far more than that. If you believe in this company, think it will IPO in the near future, and your shares aren't locked up, that might prove to be a much more rewarding opportunity for you.

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topper1296
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Re: Sell or keep shares of a private company?

Post by topper1296 » Sat Oct 07, 2017 9:32 am

Split the difference, sell 1/2 and then move on.

FoolStreet
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Re: Sell or keep shares of a private company?

Post by FoolStreet » Sat Oct 07, 2017 11:10 am

deanmoriarty wrote:
Fri Oct 06, 2017 5:25 pm
Thanks everyone for the replies so far, it's always interesting to hear the different opinions of this forum.

Admittedly I think I have a high tolerance for risk when I think I have some sort of "advantage", especially in my career. For example, a few years ago, while all my coworkers (including me) were making $~100k at a large but "old" company with good benefits, I left and joined this startup very early because I believed that what I was going to learn skill-wise would prove super valuable for my career, even if that meant a huge paycut at the time that my coworkers couldn't understand (at that time I saved up about 4 years of living expenses, so it was not a terribly irresponsible move from my point of view).

I probably just got lucky, but by working hard and sucking all that knowledge from a very innovative field, I now am a highly sought after employee in the Silicon Valley and am pulling a respectable $350k a year with those acquired skills, whereas my previous coworkers are still making those ~100k normalized with 3% raises and they couldn't command this level of compensation. And I also have this equity.

Could it have gone much worse? Honestly, I fail to see how, because the things I learned would have made me far more valuable even if the company went belly up and the equity disappeared.

So I'm trying to apply the same philosophy here and, since I am realistically able to save 150k a year after-tax (I'm still single so no big expenses), what difference does 600k really make overall? In other words, I think the regret of losing this 1M (which is not life changing) would be less significant than the regret of seeing the equity worth 5M in 4 years (which would be life changing). If we were talking about 4M now vs 20M 5 years from now, things would be completely different.

However, this reality check on the forum is very useful as it is putting things in perspective, and I'm grateful for that.

Thanks again!

If the company is doing well, let it ride. You don’t need it and it’s not enough for a house here anyway. Would the investor let you buy into one of his/her deals?

overpar
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Re: Sell or keep shares of a private company?

Post by overpar » Sat Oct 07, 2017 11:40 am

You need to get familiar with Section 1202 of the tax code. Very complex, but if you meet all the tests, your Federal tax rate can be greatly reduced. I suggest talking to the person handling the taxes for the company, or perhaps the tax pros used personally by the CEO, CFO etc.

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Re: Sell or keep shares of a private company?

Post by FoolStreet » Sat Oct 07, 2017 12:29 pm

overpar wrote:
Sat Oct 07, 2017 11:40 am
You need to get familiar with Section 1202 of the tax code. Very complex, but if you meet all the tests, your Federal tax rate can be greatly reduced. I suggest talking to the person handling the taxes for the company, or perhaps the tax pros used personally by the CEO, CFO etc.
Wow.

https://blog.wealthfront.com/qualified- ... tock-2016/

McGowan
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Re: Sell or keep shares of a private company?

Post by McGowan » Sun Oct 08, 2017 7:22 am

I've spent the last 30 years investing in private companies. By definition, these are extremely illiquid investments that are HARD to value. The over-riding lesson I have gained is that value is fleeting. What is worth X today could be worth 2X tomorrow or 0 or anywhere in between.

If the investment is in tech, I'd ask you to keep in mind that the product life cycles are extremely short. What that usually means is that the market and your competitors force you to reinvent yourself as a company regularly. That is very difficult to continually do well. As a relatively conservative investor in extremely volatile assets, I try to never forget that value can go away very quickly. There is greed and there is common sense. You don't know which is which until too late.

As others have said, it depends on your risk profile. You said the net $600k wouldn't affect your life right now. How would it affect your life if it were $0?

sixty40
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Re: Sell or keep shares of a private company?

Post by sixty40 » Sun Oct 08, 2017 8:48 am

deanmoriarty wrote:
Fri Oct 06, 2017 8:02 pm
sixty40 wrote:
Fri Oct 06, 2017 7:10 pm
So the base is $1.0M, the upside is $5.0M, and is the realistic downside $0 (or higher)? I would look at the potential upside and potential downside as a matter of percentage. If upside is 50% and downside is 10%, I would hold onto it. If upside is 10% and downside is 50%, I would take the $1.0M. Only you know the percentages.

Making $350k/yr, the $1.0M in CA after taxes is about (38%+12%) $500k, I may just hold onto it if the upside is decent.

Let's play the Price is Right (I think that was the show), If someone offered you $1.0M now, or you can trade that to pick one of 3 doors with 2 doors having $0 and 1 door having $5.0M, what would you do? Whatever you pick, how may more or less doors will it take to change your mind?

To me it is a matter of percentages and risk.
Good points. A couple things:

- Downside is essentially $0. I spent about $20k to exercise those options, in the grand scheme of things is negligible
- Not sure about your tax calculation: selling shares is long term capital gain, so why 38%+12%? My math is more like 23%+13%
Yeah, you are right on the tax calc. I mistakenly took it as "income" instead of LTCG.

On the downside risk I was thinking what is the lowest you share amount can be? If upside is shares worth $5.0M there must be a realistic bottom value, can the shares be worthless, is that realistic? It is a possibility but is it realistic.

dbr
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Re: Sell or keep shares of a private company?

Post by dbr » Sun Oct 08, 2017 2:17 pm

How does a 30 year old come up with a handle of deanmoriarity?

deanmoriarty
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Re: Sell or keep shares of a private company?

Post by deanmoriarty » Sun Oct 08, 2017 2:22 pm

dbr wrote:
Sun Oct 08, 2017 2:17 pm
How does a 30 year old come up with a handle of deanmoriarity?
Care to elaborate? I’m not sure if it’s a positive or a derogatory comment, so I’m curious :) I just happen to be a fan of Kerouac.

Procopius
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Re: Sell or keep shares of a private company?

Post by Procopius » Sun Oct 08, 2017 2:31 pm

Deanmoriarty --

The VCs are not offering you the money out of the kindness of their hearts, and you should always assume there is substantial information asymmetry between you and them. The shares must be worth more than they are offering you, otherwise they would not offer. As you are under no financial pressure to sell, you might hold on and see if a better opportunity arises further down the line.

Procopius

dbr
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Re: Sell or keep shares of a private company?

Post by dbr » Sun Oct 08, 2017 2:51 pm

deanmoriarty wrote:
Sun Oct 08, 2017 2:22 pm
dbr wrote:
Sun Oct 08, 2017 2:17 pm
How does a 30 year old come up with a handle of deanmoriarity?
Care to elaborate? I’m not sure if it’s a positive or a derogatory comment, so I’m curious :) I just happen to be a fan of Kerouac.
Oh, it is very positive. I am also a Kerouac fan but I have the idea it is not so common for him to be read outside his contemporary generation. Maybe that is a mistaken idea.

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Re: Sell or keep shares of a private company?

Post by Jebediah » Sun Oct 08, 2017 3:08 pm

Reframing might add perspective.

If you had the $650K in hand, and were given the one-time opportunity to invest it in the company, would you do so? If yes, how do you rationalize holding 50% of your AA in this private stock? I'm not saying you cannot rationalize it, but what does that rationale look like when you spell it out? i.e. "I intend to invest 50% of my NW in this one stock because..." As opposed to "should I sell?"

deanmoriarty
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Re: Sell or keep shares of a private company?

Post by deanmoriarty » Sun Oct 08, 2017 5:01 pm

Jebediah wrote:
Sun Oct 08, 2017 3:08 pm
Reframing might add perspective.

If you had the $650K in hand, and were given the one-time opportunity to invest it in the company, would you do so? If yes, how do you rationalize holding 50% of your AA in this private stock? I'm not saying you cannot rationalize it, but what does that rationale look like when you spell it out? i.e. "I intend to invest 50% of my NW in this one stock because..." As opposed to "should I sell?"
That is a very interesting point of view. My rationale would be that I know the market very very well as I’ve been at that company for several years, and I believe their organic growth will very much keep happening except maybe something catastrofic (e.g. massive recession, Korea war, San Francisco massive earthquake). I know all the people inside the company and they are extremely bullish. The area is a “boring” enterprise field they are disrupting (not a typical bubbly consumer oriented startup) and competition is there but nowhere as advanced. Again, I spent almost 5 years at this company so I know all the ins and outs.

Still your point on “would you buy 600k worth of stocks now” is definitely thought provoking.

Seems like the forum opinions are evenly spread among the two factions :)

Thanks.

nacious
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Re: Sell or keep shares of a private company?

Post by nacious » Mon Oct 09, 2017 11:10 am

overpar wrote:
Sat Oct 07, 2017 11:40 am
You need to get familiar with Section 1202 of the tax code. Very complex, but if you meet all the tests, your Federal tax rate can be greatly reduced. I suggest talking to the person handling the taxes for the company, or perhaps the tax pros used personally by the CEO, CFO etc.
Whoa.

I have been reading with interest as I am in an eerily similar situation as OP. Also 30 in CA, $750k investable, $350k annual earnings. Was an early employee in a startup, and shares are now worth ~$1M. Am still at startup, it has been 4 years since I joined. Have not been offered a buyout but am sure that I could liquidate, and the idea has crossed my mind.

Overpar: I meet all the tests of 1202 from what I can find, however I was issued options -- not shares -- and since I am still at the startup, I have not felt the need to exercise the options. Are you aware of whether one must own shares rather than options in order to qualify for the QSBS? It looks as if this is the case. If so, do you know of any other similar treatments that apply to options?

Your are making me consider paying the ~$50k OOP to exercise my options to cover for the (admittedly unlikely) outcome that my company stays private and continues growth for another 5 years. Not paying any tax on the proceeds would be :moneybag

OP: Sorry to hijack. As someone who is in similar shoes as you, I vote 'keep em'. If there was a more efficient secondary market for private startup shares, I'd say sell a good portion. Since there is not, look at it this way: You are confident for good reason and your company is no doubt filled with smart people who, absent of bad luck, have a good chance at making it big. Given you are probably busy or not an accredited investor, you might be unable to get exposure to investments like the one you are in today. The outcome of this investment is binary: you will either continue grinding, or you will be set for life. It is not 50/50, but you can rest assured that smart VC money is willing to bet on the latter. Alternatively, you can sell your shares and be guaranteed to have to continue grinding.

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Re: Sell or keep shares of a private company?

Post by psteinx » Mon Oct 09, 2017 11:34 am

deanmoriarty wrote:
Sun Oct 08, 2017 5:01 pm
Jebediah wrote:
Sun Oct 08, 2017 3:08 pm
Reframing might add perspective.

If you had the $650K in hand, and were given the one-time opportunity to invest it in the company, would you do so? If yes, how do you rationalize holding 50% of your AA in this private stock? I'm not saying you cannot rationalize it, but what does that rationale look like when you spell it out? i.e. "I intend to invest 50% of my NW in this one stock because..." As opposed to "should I sell?"
That is a very interesting point of view. [snip]
Folks on this forum often post a variation of that argument. Give questionable asset XYZ that a poster is debating selling, someone says, roughly, "If you wouldn't buy the same asset again today, then you should sell it."

But, IMO, this argument generally ignores:

1) Transaction costs, often high for these esoteric assets
2) Taxes

In *this* thread, in OP's case, both #s are likely to be significant. The transaction costs are essentially the apparently large haircut embedded in the offer price. And it's not totally clear what the applicable tax rate would be, but the overall fed, state, and conceivably local taxes on the gains are likely to be significant.

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Re: Sell or keep shares of a private company?

Post by deanmoriarty » Mon Oct 09, 2017 11:43 am

nacious wrote:
Mon Oct 09, 2017 11:10 am
I have been reading with interest as I am in an eerily similar situation as OP. Also 30 in CA, $750k investable, $350k annual earnings. Was an early employee in a startup, and shares are now worth ~$1M. Am still at startup, it has been 4 years since I joined. Have not been offered a buyout but am sure that I could liquidate, and the idea has crossed my mind.
Congrats! Just out of curiosity, how did you manage to get 350k annual cash comp at a startup? I had to jump ship to one of the big 4 to get into that range, startup earnings capped at ~250k, and not only for me but for all the various VPs and upper level execs (who of course have very significant amount of equity, but still no liquidity).

Thanks :)

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Re: Sell or keep shares of a private company?

Post by nacious » Mon Oct 09, 2017 11:50 am

I run sales and go to market strategy, so commissions and cash bonuses are about 40% of total on target earnings. Pulling it in as a salary must be nice though!

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Re: Sell or keep shares of a private company?

Post by OldLearner » Tue Oct 10, 2017 12:21 am

(Warning: This response contains a very non-Boglehead recommendation. You might want to get the children out of the room.) In 1999 the founders of Google tried to sell the company for $1,000,000 to Excite.com. Excite passed, and the rest, as they say, is history. It sounds like you bought a $20,000 lottery ticket (at much better than lottery odds). You're young. This is the chance of a lifetime. My (very non-Boglehead) response is to let it ride. A million dollars after taxes won't change your life; five or ten (or twenty) million will.

But then again, all my regrets were about the trips I didn't take, the dances I didn't dance, and the chances I didn't take. And if you go bust, you still have the story about the time you plopped down $20,000 on black and kept the wheel spinning.

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Re: Sell or keep shares of a private company?

Post by rrppve » Tue Oct 10, 2017 12:57 am

A 40% discount due to the lack of liquidation preference is complete BS. Later stage investors want to get their money out first if something goes wrong. It is one way they compensate for the information asymmetry when they buy-in, and also reduce their risk. A more reasonable haircut would be on the order of about half that, 15-20%.
Also preferred shares in early stage companies almost always have voting rights in addition to liquidation preference. Sometimes they even have special rights as a class, for example the Series C shares may be entitled to elect X board members.
Seems like you could tolerate the investment going to 0, but would you prefer the reduced $ now? Personally, I'd never accept a 40% discount, but that's just me and it's easy to opine from the peanut gallery when you have no skin in the game.

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Re: Sell or keep shares of a private company?

Post by White Coat Investor » Tue Oct 10, 2017 1:03 am

Why not split the difference? Sell half.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Sell or keep shares of a private company?

Post by aqan » Tue Oct 10, 2017 1:21 am

Do you think company could turn out to be the next Facebook or google? If so keep the stock otherwise sell :)

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Re: Sell or keep shares of a private company?

Post by deanmoriarty » Tue Oct 10, 2017 2:12 am

Thanks everyone.

After thinking more about it, I decided to refuse the investor offer, I am too bullish on the company and taking 600k right now would not make a single difference at all in my life. I personally know people in SV who went this route before and ended up cashing 5M, which was life changing as they relocated and retired in their mid 30s :).

If they will go to 0, so be it, I’m financially diligent enough from the savings point of view and I see myself still fully employable in this field for at least a good 10 years. In the worst case, it will be a learned lesson for the future.

I will make sure to update this thread in a few years, when this situation will come to a closure.

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Re: Sell or keep shares of a private company?

Post by psteinx » Tue Oct 10, 2017 10:27 am

Thanks for the follow up, OP, and I'm hoping to see an extended follow up down the line.

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