What to do with an Equity Windfall?

[PaulMaxime]

Hello-

Here's a bit of background:

First off, I've been extremely lucky in my career.

I live in San Francisco, work for a successful "unicorn" startup. I am for all intents and purposes FI at this point, though I continue to work. I have substantial equity in the company at a very low strike price which is about 50% vested. Full vesting will happen in about 2 more years. My being FI does not really depend on this equity. I like my job but retirement is becoming more attractive all the time.

I own a condo here in the city with a mortgage which is about 25% of the current value of the property.

My situation is that our company is offering us the opportunity to sell about 10% of our shares to outside investors. This sale will enable me to pay off the mortgage and be completely debt free. Psychologically this is very attractive to me but I'm wondering what others might do in this situation.

I will definitely take full advantage of this sale opportunity since you never know the future. I still retain 90% of my shares after this, so there is still the potential for a large upside.

[Plugging Along]

I would definately sell especially if the c9mpany is newer.  Bird in hand is worth more 5han two in bush.

There has been several times where we have had shares in tech co pansies as my spouse is in high tech.  Many of them the shares were worth a lot or the potential was, and we didn’t sell because we thought if we held long enough it would be better.  Some of them ends up being worth nothing.

Since this is only 10% of the share I would crystallize some of the gains while they are a sure thing.

[Dicey]

These are seperate decisions.

Sell shares? Yes or no.

Pay off mortgage? Yes or no.

Only you can decide, but these decisions do not need to be linked.

[Murse]

I would sell the stocks. The tougher question would be to pay off the mortgage or not?

[Dicey]

I'm going to make this a separate post, instead of adding to the one above.

Upon reflection, we sorta did something similar, though it wasn't our intent initially. We sold two equity-rich houses and paid a shit-ton of cash for our current home. Five years later, mortgage rates are still low, and we occasionally wish we had grabbed some fistfulls of that cheap, tax-favored money.

Our consolation is that housing in the Bay Area has skyrocketed in the same period. We kinda overpaid for this house (bidding war), but it has increased nearly 50% in value, based on recent comps. It also serves our specific needs at this point in our lives. Equally important, our big pile of other assets has grown quite nicely, too. We, like you, are not dependent on the equity in our home to achieve FI/RE.

With the info you've provided, it's probably a coin toss, but you can still sell the shares if you wish and wait to decide about paying off the house.

[PaulMaxime]

Thanks for the input.

Selling the shares is a no brainer. I'll still have 90% of my equity after this and there's no guarantee that any of that will be worth a dime in the future.

Since I won't be cash poor after paying off the house, it's very tempting to just be done with it and reduce my monthly outflow by about a third.

On the other hand it's not really mathematically optimal but it might give me peace of mind.

You are right that they are separate decisions. So I'm definitely selling. I won't see the money until late January and even then nothing is forcing me to decide.

I also considered just putting "some" money on the mortgage but that doesn't change my monthly cash flow at all.

[Dicey]

Uh, nope. "Some money" is not optimal either, because unless you recast, your payment won't change. How about this - invest the money (diversified, low fee, blah x3), then add to it by cutting out a little fat from the budget here and there. Then, when you have enough to kill it with a single blow, smite that sucker if you still want to. It will be more fun (and cost-effective) that way. Just my two cents. The good news is that in your position there's really no wrong answer.

[PaulMaxime]

Uh, nope. "Some money" is not optimal either, because unless you recast, your payment won't change. How about this - invest the money (diversified, low fee, blah x3), then add to it by cutting out a little fat from the budget here and there. Then, when you have enough to kill it with a single blow, smite that sucker if you still want to. It will be more fun (and cost-effective) that way. Just my two cents. The good news is that in your position there's really no wrong answer.

Yeah, I came to the same conclusion. I had been paying extra and throwing chunks at the house for a while but then I realized it was better to save up and just pay it off all at once if I wanted to.

Thanks again!

[terran]

On the other hand it's not really mathematically optimal but it might give me peace of mind.

Sounds like that's your answer. You know what the mathematically "right" answer is, so it's really just a question of whether you're willing to "spend" (not gain) some money in order to buy the peace of mind? Nothing wrong with that as long as you realize that's what you're doing, which it sounds like you do.

[Dicey]

On the other hand it's not really mathematically optimal but it might give me peace of mind.

Sounds like that's your answer. You know what the mathematically "right" answer is, so it's really just a question of whether you're willing to "spend" (not gain) some money in order to buy the peace of mind? Nothing wrong with that as long as you realize that's what you're doing, which it sounds like you do.

A bigger piece of peace of mind than paying off a cheap mortgage early is a giant 'stache, from which one can do that if they desire, and so much more. Literally almost anything they can dream of. Trust me, we were blown away like you wouldn't believe when it happened to us. We still are blown away, and extremely grateful.