Leaving Company - Exercise Vested Options or Let Expire?

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wilked
Posts: 2136
Joined: Thu Mar 24, 2011 1:50 pm

Leaving Company - Exercise Vested Options or Let Expire?

Post by wilked »

High level scenario:

-BioPharma sector
-Company recently raised $500MM in a Series D (company ~2 years old at this point)
-Company intends to go IPO, but timing not clear. If asked I would say highly likely within the next 12-18 months, but it's a guess

I have 2000 vested options with strike price of $25 fully vested. These options will expire 3 months after I leave the company, so the clock is about to start ticking. When I go to the financial page which has my holdings, it lists the FMV at $35.

If I exercise I need to pay out $50K and check for AMT. I can afford that but it would tie up a significant portion of my 'loose cash', so it will be noticeable to my finances. If I were to do that, I would look to cash out as soon as I could post-IPO.

On paper it indicates there is $20K of value there. I can't tell when that $35 FMV was evaluated but I 'presume' it was done at the recent Series D.

Any advice is appreciated, thanks
dcabler
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Re: Leaving Company - Exercise Vested Options or Let Expire?

Post by dcabler »

wilked wrote: Thu Nov 24, 2022 7:38 am High level scenario:

-BioPharma sector
-Company recently raised $500MM in a Series D (company ~2 years old at this point)
-Company intends to go IPO, but timing not clear. If asked I would say highly likely within the next 12-18 months, but it's a guess

I have 2000 vested options with strike price of $25 fully vested. These options will expire 3 months after I leave the company, so the clock is about to start ticking. When I go to the financial page which has my holdings, it lists the FMV at $35.

If I exercise I need to pay out $50K and check for AMT. I can afford that but it would tie up a significant portion of my 'loose cash', so it will be noticeable to my finances. If I were to do that, I would look to cash out as soon as I could post-IPO.

On paper it indicates there is $20K of value there. I can't tell when that $35 FMV was evaluated but I 'presume' it was done at the recent Series D.

Any advice is appreciated, thanks
First thing you need to figure out is whether the company has "first right of refusal". In my industry, this is pretty common - and why I decided to never again work in a startup in which I was not a principal.

It means that if you attempt to exercise your options before a liquidity event (IPO, sale to a 3rd party, whatever) that the company has the right to re-purchase the shares back from you. As I was told when I attempted to do this once - "Before your check even clears for the purchase, we will cut a check back to you to purchase the shares back".

Cheers.
HomeStretch
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Re: Leaving Company - Exercise Vested Options or Let Expire?

Post by HomeStretch »

You have 3 months to exercise so you can wait until closer to the option expiration date to decide.

Is there a cashless exercise option where some shares are sold at exercise to cover tax withholdings?

If not, you could possibly exercise the options, pay the cash exercise price and immediately sell enough shares to recoup your cash. This assumes there is the ability/mechanism to sell the shares received upon exercise given it’s a private company. You also need to be careful that the company doesn’t enter a pre-IPO lock-up or other black-out period that prevents you from selling for a period of time if you need the cash back immediately.

Check the option plan document and your option grant agreement.
HockeyFan99
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Re: Leaving Company - Exercise Vested Options or Let Expire?

Post by HockeyFan99 »

Some comments below but the biggest one is this: before you tie up $50K that you have but that is meaningful to you, make sure you fully understand your options, your equity incentive plan, and the different choices available to you. Some questions to your HR / Legal teams, if they are helpful and you trust them, might get this for you for free. Otherwise, or if you want to be certain, a benefits lawyer experienced in this area will help you make sense of it quickly and it will be worth the money.

Other points:

- Ask and do not guess about the 409A. This is typically done after the financing, and it could move the number materially from $35. You may have even done a down round - many companies are right now.
- The comment below about right of first refusal is off base - they do not apply to options at all, and it misrepresents how it works when it comes to a sale, at least in typical cases - and I am disappointed in whomever gave that counsel to that commenter.
- There are many different potential paths forward here that may or may not be open to you, depending on the specifics of your company’s plan. Examples: exercise financing from either your company or a third party, an exercise and sale as part of a tender or other secondary, extended PTEP per your plan or you individually.

Personally, I would start by asking about your options to either finance or delay the option exercise decision, see what you get in response from the company, and consider getting a second opinion. You have a bit of time, and it’s a lot of money to tie up - and potentially lose completely - without a clear(er) understanding than what you will be able to get on this board.
"I'm spending a year dead for tax reasons." - Hotblack Desiato
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Brantley
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Re: Leaving Company - Exercise Vested Options or Let Expire?

Post by Brantley »

This could be a great idea…or a terrible idea.

Unfortunately there isn’t really a market for private shares, so if the company does not go public, you could be caught holding the bag. You could also pay AMT that you never recoup. Agree with the comment from the prior poster - you should find out what the current 409a valuation is from the latest financing round. If your options are not significantly in the money, what’s the point? Your hope is that the stock price would skyrocket once an IPO happened. It’s a different market right now, so if an IPO event happened, the valuation may not be significantly higher than the pre-IPO valuation. 12 months ago IPO valuations as compared to private round financing for biotechs were massively different, but the valuation from your Series D may be more indicative of what an IPO valuation would be.

Do you think there is some sort of catalyst event that is on the horizon, that is not baked into the current valuation?

Personally if I would no longer be at the business, you would lose a lot of visibility, and personal connection to the business.

Tough choice, but my knee jerk reaction is it may not be worth the risk, without having any knowledge that you may have.
~Brantley
chassis
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Re: Leaving Company - Exercise Vested Options or Let Expire?

Post by chassis »

wilked wrote: Thu Nov 24, 2022 7:38 am High level scenario:

-BioPharma sector
-Company recently raised $500MM in a Series D (company ~2 years old at this point)
-Company intends to go IPO, but timing not clear. If asked I would say highly likely within the next 12-18 months, but it's a guess

I have 2000 vested options with strike price of $25 fully vested. These options will expire 3 months after I leave the company, so the clock is about to start ticking. When I go to the financial page which has my holdings, it lists the FMV at $35.

If I exercise I need to pay out $50K and check for AMT. I can afford that but it would tie up a significant portion of my 'loose cash', so it will be noticeable to my finances. If I were to do that, I would look to cash out as soon as I could post-IPO.

On paper it indicates there is $20K of value there. I can't tell when that $35 FMV was evaluated but I 'presume' it was done at the recent Series D.

Any advice is appreciated, thanks
I would exercise. Tax and advance payment aside, it is a net benefit, correct?

3 months will flash by in an instant. IPO processes take much longer than that. Probability suggests that expiration is more likely than IPO in less than 3 months.
HornedToad
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Re: Leaving Company - Exercise Vested Options or Let Expire?

Post by HornedToad »

See if you can also sell half/all on a private equity exchange. Ala: https://equityzen.com/ or the like

If you are not going to exercise I also remember seeing at least one website that will potentially split the cost of exercising with you in exchange for part ownership. Could be worth checking
GeMoney
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Re: Leaving Company - Exercise Vested Options or Let Expire?

Post by GeMoney »

I was an accounting consultant and several of our biotech clients IPO between 2016-2019 and I worked on a number of those projects. The bottomline is it all depends on how successful their clinical trials were. Of those IPOs, we had one client that had a failed clinical trial and eventually shut down the company, a few had not so good clinical data and their stock price dropped below their IPO price, and a few companies were bought out at a favorable price, and a few continue to do well from a stock price perspective.

How good is your crystal ball?
kiwi123
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Re: Leaving Company - Exercise Vested Options or Let Expire?

Post by kiwi123 »

Talk to the Finance Dept about the process to exercise your options and how far in advance to get your $s to them. They should also be able to clarify the other questions raised. I would wait until closer to the 3-month mark before cutting a check.

Note: there's probably a greater chance that the company gets acquired vs. an IPO (and an even greater chance that the business fizzles and goes away). From Series D, don't expect a liquidity event for at least 5 years (and be happy if it happens sooner).

I would exercise at least some, in case something positive happens down the road, as it seems like you can afford to take the risk (and know that most of the time options end up being worth $0).
brad.clarkston
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Re: Leaving Company - Exercise Vested Options or Let Expire?

Post by brad.clarkston »

If your even questioning tying up that much cash I would say no.
I would probably exercise $10k in the hopes something good comes out of it in 5-10 years but I wouldn't count those chickens any time soon.
-- Only a Sith deals in absolutes --
milktoast
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Re: Leaving Company - Exercise Vested Options or Let Expire?

Post by milktoast »

dcabler wrote: Thu Nov 24, 2022 7:51 am First thing you need to figure out is whether the company has "first right of refusal". In my industry, this is pretty common - and why I decided to never again work in a startup in which I was not a principal.

It means that if you attempt to exercise your options before a liquidity event (IPO, sale to a 3rd party, whatever) that the company has the right to re-purchase the shares back from you. As I was told when I attempted to do this once - "Before your check even clears for the purchase, we will cut a check back to you to purchase the shares back".
Well that makes the decision easy. Either they are lying to you or you can just bank the extra dough. The right of first refusal doesn’t let them pay you less than they are currently valuing shares. So in the case of the OP, the company would be cutting a check for $35/share immediately after OP writes one for $25.

It’s more common that they don’t immediately exercise this right. And then you have restricted shares you can’t sell at all. And you just have to hope for liquidity event to get your money back.

That said, I have heard of the company buying back immediately because they were approaching a liquidity event at a higher number than the last assessment of FMV.
HockeyFan99
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Re: Leaving Company - Exercise Vested Options or Let Expire?

Post by HockeyFan99 »

Since this seems to be a persistent source of confusion I’ll try one more time:

- a Right of First Refusal (ROFR) operating in favor of the company gives the company the right - but not the obligation - to step in and buy shares of the company when a current shareholder proposes to sell them to some third party (another investor, for example)
- the ROFR does *not* apply if you choose to exercise your options. An option, once vested, lets you pay the exercise price (hopefully less than the current value of the share, otherwise you should not typically exercise) and transfer your option into an actual share of the company. Now you are an actual shareholder, not just an optionholder.
- Sometimes, such as in the case of a major liquidity event for a company, option holders will exercise and sell all as part of a combined transaction. In that case, a ROFR could well apply.
- In this case, the OP is not looking at a near-term company liquidity event. The decision is whether to exercise the options within the post-employment exercise period (PTEP) of 90 days, or let them expire and vanish.
- If OP exercises there may / may not be a way to sell them in the future. And they may / may not ever be saleable for more than the exercise price (here $25). That’s the gamble.
- In the future IF there is an opportunity to sell for more than the exercise price and IF the company has a ROFR and IF the company chooses to exercise it, the company could step in ahead of the proposed purchaser and buy the shares from the OP instead.
- in that scenario, the company still has to pay fair value for the shares. It is not the case, as some have implied (and apparently been told, by people who were either misinformed or worse) that the company can step in and buy the shares for whatever they want, or for some much cheaper price than the OP would otherwise be able to sell them for.
- the risk here is not that the company will later fleece the OP using the ROFR. The risk is that the company will fail to profitably exit, as so many private companies do, and the money the OP spends exercising the options on the hope of a future profitable sale will be wasted.

There’s real risk here, just not exactly the one that is being identified in all of the posts above.
"I'm spending a year dead for tax reasons." - Hotblack Desiato
Topic Author
wilked
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Joined: Thu Mar 24, 2011 1:50 pm

Re: Leaving Company - Exercise Vested Options or Let Expire?

Post by wilked »

Thanks all. Will talk to finance department on details.

If I could simply extract the value today that is my preferred option (ie Shares*(FMV-StrikePrice)). I'll see if that is possible

I probably won't do a half measure. I'll either exercise all or none. It's a lot of money for me, but I'll survive whatever outcome just fine.

I won't do anything until a month ahead of the expiration (maybe gain some knowledge in the interim)

I obviously need the option plan document. I can't find it from the website where the options are, may need to ask specially for it.

Thanks
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Brantley
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Re: Leaving Company - Exercise Vested Options or Let Expire?

Post by Brantley »

wilked wrote: Sat Nov 26, 2022 2:28 pm Thanks all. Will talk to finance department on details.

If I could simply extract the value today that is my preferred option (ie Shares*(FMV-StrikePrice)). I'll see if that is possible

I probably won't do a half measure. I'll either exercise all or none. It's a lot of money for me, but I'll survive whatever outcome just fine.

I won't do anything until a month ahead of the expiration (maybe gain some knowledge in the interim)

I obviously need the option plan document. I can't find it from the website where the options are, may need to ask specially for it.

Thanks
You should ask for the following things:
1) Latest 409a valuation (fair value)
2) Option agreement - this should be an agreement you signed for the grant, and should also reference your equity plan document
3) Equity plan - this is the plan the options were granted under, and should answer all of the prior questions
~Brantley
CletusCaddy
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Re: Leaving Company - Exercise Vested Options or Let Expire?

Post by CletusCaddy »

A few months ago I was in a similar position. As someone mentioned above there are companies that will lend you money to exercise the shares and you don’t have to pay them back. Instead they take a portion of any eventual profit upon an exit event.

I spoke with 2-3 of these and none of them were interested in my company. That told me all I needed to know, and I let my options expire.
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