Author Topic: Exercising stock options in a startup shifting to 'lifestyle' business  (Read 995 times)

kristof

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I've been working part time for a VC/angel funded startup for a few years and have a sizable chunk of stock options. The business is profitable and has shown solid growth (50%+ per year the last few years), but hasn't gotten big enough to be worth the original investors' time, so the founders are working on buying them out and shifting into a mode where they're no longer actively looking for an acquisition or IPO but would eventually pay dividends to the remaining shareholders (i.e. the founders and anyone that exercised options or doesn't get bought out).

I'm trying to figure out whether/when to exercise some or all of the stock options. I have the option of continuing to work on a part time basis for them to extend the time where I don't have to decide. It's fun and not too stressful work, but I'd need to work a bit below market rate to get this 'perk'. If I left, I'd need to decide within three months how much if any of the options I'd want to exercise.

I'm not looking for a specific answer so much as advice on the right kind of questions to ask and data to collect/analyze, as well as experiences from people that have been in a similar situation or recommendations for professionals who could help me analyze the situation impartially. I can't seem to find too many stories of this kind of shift as most of my friends' experiences involve either the company simply failing or getting acquired.

I have very detailed knowledge of our revenues and sales pipeline, and some knowledge (but not as granular) on the cost side. The growth prospects seem solid and I trust the management having known them for years, but I'm a bit wary of tying up a lot of capital in an investment that's a lot less liquid than the rest of my portfolio (which is a pretty standard three-fund Vanguard setup), and whether "we'll pay dividends sometime" is enough of a plan to be worth throwing real dollars at.

sokoloff

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IMO, and with no more facts than you have shared (which is fine, of course), I'd try to get my options treated analogously to how the investors' shares are being treated. (IOW, can you sell your shares at the same terms [adjusted appropriately for "round"] as the investors? If so, is that profitable after paying the exercise price? If so, do that.)

Most of the value of most businesses is in the terminal enterprise value, not in the stream of "future, maybe someday" dividends. Absent an IPO, you may have a very tough time every extracting this value.

Now, if you have 100K shares at an exercise price of a penny and $1000 won't change your life, I'd definitely exercise and hold rather than letting them lapse if the founders won't buy you out.

chasesfish

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Who is on the other side of the option trade if this is a private business?

Would you rather have the money in an index fund or keep this as a hobby investment?  What percent of your net worth do you think this is?

sokoloff

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Who is on the other side of the option trade if this is a private business?
The company.