Should I exercise stock options?

[Leo]

I am planning to leave my current company. If I do that, should I exercise my non-qualified stock options (NSO) or accept to lose it?

I've been in this private company for 2 years now. The company was 4 years old with about 100 employees when I joined.

I was offered 7500 stock options (0.05% out of 15 million total shares) and for the exercise price of $8.00.

Fast forward to now, the company double the number of employees with 200+ and still growing. The company is okay and safe financially pre-COVID and actually doing better with COVID-19. The recent Fair Market Value (FMV) is now at $27.50.

I only have 3750 vested today but if I exercise the entire vested options, that means I have to pay $30,000. I know stock options in a private company are not really liquid and may never become liquid unless the startup company got bought, become public or start doing tender offers, etc.

Personally, we do have that cash but we are planning to buy a house here in a very expensive state of California and continue saving/investing. Besides 401k and IRAs and no debt, we have about $150,000 in hand.

If you were in my shoes, would you buy all or some of the vested stock options in a private company that you are planning to leave? What's your take on stock options of a startup tech company?

[disneysteve]

So you can spend $30,000 for stock worth $103,125. Other than not having the cash free, what’s the downside? Once you buy it, can you sell it right away or is there a holding period?

[Leo]

So you can spend $30,000 for stock worth $103,125. Other than not having the cash free, what’s the downside? Once you buy it, can you sell it right away or is there a holding period?

No I cannot sell it right away. I believe I can only sell it if an event happens such as the company got bought, become public (IPO), or company start doing tender offers, etc. so yeah the downside for that is liquid is not guaranteed immediately and may take years and years before I see the cash, and worst case if company becomes bankrupt or something, that $30,000 will be gone. Stocks would not amount to anything if company goes down.

[Singuy]

No I cannot sell it right away. I believe I can only sell it if an event happens such as the company got bought, become public (IPO), or company start doing tender offers, etc. so yeah the downside for that is liquid is not guaranteed immediately and may take years and years before I see the cash, and worst case if company becomes bankrupt or something, that $30,000 will be gone. Stocks would not amount to anything if company goes down.

Sounds like the best person to answer this question is yourself considering you know about this company infinitely more than a stranger on the internet who doesn't even know the name of your company. We can't determine if the stock option is a good buy or not.

[disneysteve]

So you're leaving the company and need to decide if you want to invest 30K into that company in such a way that you may not be able to sell your stake for a significant period of time and the possibility exists that you could lose your entire investment if the company fails.

I agree with Singuy that it's really impossible for us to give an intelligent answer without knowing details about the company.

I'd make a couple of comments with that in mind.

1. If you were a random Joe looking to invest 30K in this something and this opportunity presented itself, do you think you would do it, or would you be more likely to invest that 30K elsewhere?

2. If you were to buy the 30K of stock, what % of your portfolio would that represent?

Of course, there is another option here. You don't have to exercise all of your options, right? You could choose to invest a smaller amount, perhaps 10K, as a long term speculative investment. If it goes to zero, it won't be as hard a hit, and if it becomes the next big thing, that 10K could still turn into a nice chunk of change down the line.

[Leo]

So you're leaving the company and need to decide if you want to invest 30K into that company in such a way that you may not be able to sell your stake for a significant period of time and the possibility exists that you could lose your entire investment if the company fails.

I agree with Singuy that it's really impossible for us to give an intelligent answer without knowing details about the company.

I'd make a couple of comments with that in mind.

1. If you were a random Joe looking to invest 30K in this something and this opportunity presented itself, do you think you would do it, or would you be more likely to invest that 30K elsewhere?

2. If you were to buy the 30K of stock, what % of your portfolio would that represent?

Of course, there is another option here. You don't have to exercise all of your options, right? You could choose to invest a smaller amount, perhaps 10K, as a long term speculative investment. If it goes to zero, it won't be as hard a hit, and if it becomes the next big thing, that 10K could still turn into a nice chunk of change down the line.

I think you nailed it. Bottom line, I am not sure if investing 30K into a start up company with great potential is a good decision financially, and yes the risk is that there is no guarantee that I can sell my stake immediately and there is a possibility that I could lose my entire investment if the company fails.

Good question and to answer your question.

1. If I have an extra 30K, the safest bet is S&P500. Another option is down payment to a condo or house somewhere where it's a little cheaper than California (maybe Las Vegas?) and have a rental income. I think the third option is speculative investment or basically gambling and invest it on something like Bitcoin, or company with potential like Tesla or this private company.

2. Currently, we do not have any investments outside of retirement (401k and IRAs). Our current IRA+401k is about 177k or half of our current net worth.

I think choosing to invest a smaller amount like 10K or something is a great option. Like you said the risk is low, but also the award is not super big of course.

[disneysteve]

2. Currently, we do not have any investments outside of retirement (401k and IRAs). Our current IRA+401k is about 177k or half of our current net worth.

You have 177K in retirement and 150K in cash, so 327K total.

No, I would absolutely not put over 9% of your money (30K) into a single non-liquid investment that could take years to realize any return, and may never.

Now 10K, or 3%, might be considering, but you are the one who knows the details of the company and what their prospects are.

[Leo]

You have 177K in retirement and 150K in cash, so 327K total.

No, I would absolutely not put over 9% of your money (30K) into a single non-liquid investment that could take years to realize any return, and may never.

Now 10K, or 3%, might be considering, but you are the one who knows the details of the company and what their prospects are.

Thanks for your perspective!

You're right, I think putting about 8.5% of our net worth to this single basket might not be a good idea, but maybe 10K or 3% is something I would consider and I think I am comfortable doing that for a speculative investment. Who knows maybe after few years it will be 10x where I can cash it for 100K (right now it is at 3x), or if I lose the entire 10K then like you said it won't be as hard as a hit.

[Leo]

Interesting. Looks like my company is doing really well. I just got the news that last week the company just acquired another startup with 70 employees for 150M.

[disneysteve]

Interesting. Looks like my company is doing really well. I just got the news that last week the company just acquired another startup with 70 employees for 150M.

Sounds promising. I still wouldn't sink 9% of my portfolio into the company stock but it sounds like taking the smaller stake isn't a bad idea.