Are shares in small private company worthless?

[throwaway7474]

I own some shares in a former employer and have some relatively cheap options to buy some more. The business started life as a venture-funded startup, but the VC's have written it off as the growth was too slow. It's now profitable and being run as a lifestyle business by the founder, who bought out the VC's a while ago.

On paper my options look pretty valuable (around 10-20% of my best guess at FMV), but I'm unsure about whether there's any chance at liquidity here. The founder controls the majority of shares and I don't see her having any incentive to buy out the remaining investors (early funders/a couple employees) or to pay dividends. And I don't have much leverage to change anything about that.

So I'm inclined to let the options expire, but wondering if any Mustachians have experience in this kind of situation, in case there's some leverage I might have that I didn't think about, or an offer I can make to the founder that nets me more than $0.

[NorCal]

You have no leverage. Just let the options expire.

Companies like this do occasionally sell. So it’s not like the possibility of payout is zero. But I’d be very hesitant to tie my money up in something with this type of return profile. You have a very high probability of seeing $0 back, and a small probability of a 5x-10x return.  While there are certainly worse return profiles out there, it’s not something I’d jump at.

[LD_TAndK]

You know best on whether this company has good prospects and sane ownership. But I wouldn't do it.

A family member is in a similar position, minority ownership with another person having majority ownership. She has wanted to sell for a decade but needs the majority owner to do it as potential buyers would only want to buy the company outright. The majority owner has mental health issues and it's unclear if they'll manage to line up a buyer or if the business will decline and buyers will flee.

[Omy]

DH has shares in a small private company he no longer works at. At one point the owner asked to buy some of DH's shares so they could give them to new employees. He only received $5k, but it was more than the $0 payout he was expecting.

[Metalcat]

I have shares of a small company, I don't count them towards my net worth. If I get money for them someday, it will be a nice surprise.

[throwaway7474]

Thanks for all the responses, super helpful.

An alternate strategy I've been mulling is to be obnoxious enough a shareholder (requests for updates, financial info, etc) to motivate her to buy me out. I'm pretty sure she has the money since my chunk of stock is so small.

I'm usually not great at such maneuvers, but I'm annoyed enough by her refusal to disclose the financials in writing when I asked for them recently to help value my options that I think I could give it a credible shot for a bit.

Has this ever worked for anyone?

[reeshau]

Do you have access to the articles of incorporation and bylaws?  I would be surprised if the VC's hadn't laid out a process for potentially exiting / valuation while still private.  Maybe the current owner left that in place?

My stepfather was a part owner in a small-but-not-so-small business.  There were two other shareholders, each with 1/3.  Their bylaws stated that the company would be valued annually, along with the process of issuing a dividend.

Long story short, they didn't follow that for several years, then had a falling out, so that aspect turned ugly.  Moral of the story: even if on paper, it might not mean much.  But if something does exist, maybe the majority owner would be open to a buyout.

If others are in the same situation, is the company perhaps listed on a private company exchange?

[maizefolk]

On paper my options look pretty valuable (around 10-20% of my best guess at FMV), but I'm unsure about whether there's any chance at liquidity here. The founder controls the majority of shares and I don't see her having any incentive to buy out the remaining investors (early funders/a couple employees) or to pay dividends. And I don't have much leverage to change anything about that.

I've heard lifestyle business mean anything from essentially a consulting gig where the founder is selling her time as a semi-decent hourly rate to a business that would be producing hundreds of thousands (but not millions) in free cash flow but the founder takes that as salary.

In the first case, I'd say your options are indeed not worth much of anything.

In the second case, it wouldn't be uncommon for the founder to eventually get tired of playing CEO and want to exit even if it's not for a vast sum of money, or bring in professional management and enjoy some dividends without the need to be working at/worrying about the business themselves.

In that case your options could be worth something.

[Boll weevil]

Thanks for all the responses, super helpful.

An alternate strategy I've been mulling is to be obnoxious enough a shareholder (requests for updates, financial info, etc) to motivate her to buy me out. I'm pretty sure she has the money since my chunk of stock is so small.

I'm usually not great at such maneuvers, but I'm annoyed enough by her refusal to disclose the financials in writing when I asked for them recently to help value my options that I think I could give it a credible shot for a bit.

Has this ever worked for anyone?

Do a web search on “shareholder rights”, then ask for stuff you have a right to. It’ll probably help if you can cite which federal and state laws entitle you to those. If she refuses to provide it, you may want to enlist an attorney to write a lawyer letter (hope fully you can get one at a reasonable rate). That would certainly be attention-getting to me.

[reeshau]

I eouldn't even ask her directly.  Look up the company's corporate contact and address, and send a letter to the secretary of the board of directors.  They should maintain all the shareholder documentation.

[GuitarStv]

I had the option to exercise stock options at 55 cents a share.  It didn't seem like a good idea at the time, so I let my options expire.  A year later they were selling for 5 cents a share.  Last I checked they're around one cent a share.  :P