Case Study: How do we value assets?

[lutorm]

Hey all,
Thought I would post up our case study to get some input about our economic situation:

Us: 48 & 38, married filing jointly, one kid ~2, one more in the planning stage. Living in HI.

Gross wages: me ~$180k, wife ~$80k. However, my taxable income was about $250k because of taxable RSU grants.

Pre-tax deductions: Both maxed out 401k. Wife also has a defined contribution plan she contributes ~$5k to. FSA $1k.

Long Term Capital Gains: About $150k in 2018. Will be more in 2019, see below.

Adjusted Gross Income: $450k in 2018.

Taxes: total $160k in 2018.

Current expenses (annual):

• Mortgage P&I: $19k
• Mortgage T&I: $5k
• Groceries: $16k
• Restaurants: $2k
• Utilities (power, water, internet, phone etc): $3k
• Childcare: $10k
• Vehicles: $2k
• Home improvement: $6k
• Cleaning and yard services: $5k
• Misc household shopping: $4k
• Donations (charitable and political): $3k
• "His" fun stuff (workshop, airplane, motorcycle, electronics): $9k
• "Her" fun stuff: $3k

Total expenses: $88k

Assets:

• 401k, IRA, Roth: $530k
• Taxable investments: $560k
• Cash: $50k
• Home value: ~$300k
• Private stock: $1.2M (on paper, the topic of this post)

Liabilities:

• Mortgage principal: $170k, 30-yr, 4.375%
• Student loans: $33k, 0.16% interest

Question: As you can see, about half our net worth is in private equity. This is mostly from exercising ISO grants from work, but some of it is from RSU grants. I have $300k in further RSUs vesting over the next 3-5 years, and fully expect to be granted more. I also have $160k of remaining ISOs I can exercise. (The strike price on the ISOs are 1/20-1/5 of the current FMV.)

So this sounds great, but the problem is that these stocks are highly illiquid. Until there's an IPO, which is not in the cards for the foreseeable future, they can basically only be sold back to the company. They have been pretty good about arranging stock buybacks, which is how I've funded most of the exercises and pay the subsequent absurd amount of AMT. This year I managed to realize about $250k gains that I've put into index funds, since I'm getting pretty uncomfortable with the lack of diversification here.

The potential for actually realizing all the paper value seems dubious. The company has been doing very well, but we're in a risky business and are doing a lot of cutting edge development that may not pan out. History is also replete with stories of common stock holders that have been left with nothing after acquisitions. Furthermore, these buybacks are always oversubscribed and are often only available to current employees, so it's not clear on what timescale I'll be able to sell them even if I tried. We're evaluating the potential for FIRE in the next few years, but if I leave my job the chances of realizing these gains will be even less.

So how should we evaluate our economic situation here? The conservative viewpoint, which we have generally been adhering to, is that the illiquid stock is worthless and any gains coming out are unexpected windfalls. That would leave our current net worth somewhere around $1.2M, which isn't nearly enough with our current expenses. However, that seems unnecessarily pessimistic given how things have been going. If you take the optimistic viewpoint and value them at the current FMV, our net worth is $2.4M in which case it seems we're basically FI already. The truth most likely is somewhere in between, but where?

Another consideration is taxes. If I try to realize as much of these gains as possible, while still working, I'm shooting up into the 23% tax rate on the gains. Right now I still have about $100k in AMT credit from the ISO exercises, but that won't last long. So what do you guys think? Diversify, taxes be damned, or hope for the best and stay in?

[marty998]

How much do you think free internet advice over a potential $1.2m payday is worth? Hint: You'll get what you pay for.

Find a good CPA, get some specialised advice.

[BicycleB]

OP, good questions. Obviously a judgment call because of the trade-offs. Congrats on reaching the point of such positive problems!

Assuming that you're happy with your lifestyle and your primary financial goal is to secure it, continuing to cash out when the opportunity arises would give you the most certainty of achieving that goal. Once you achieve it, each of you can of course add to the stash IF you want to by continuing to work.

Also, in future it's possible that the tax rates will go up generally. 23% of something you actually receive isn't so bad... whereas zero percent tax on zero return is zero.

[ysette9]

Short of buying a crystal ball to predict the future, I think how you value these assets will end up being a reflection of your risk tolerance. Personally I am risk-averse so I would hesitate to value them much at all based on what you said. I would choose to plan to never get an IPO and be pleasantly surprised if it did happen.

My mother worked for a startup that is now celebrating its 20th anniversary. She has still not had a liquidity event to cash out on all of the options she had been buying over the years. Good thing she planned other means to fund their retirement or they would still be working today.

[lutorm]

Thanks everyone for your responses.

Marty998: Obviously I'm not asking for tax advice, I have a pretty good handle on that part.

OP, good questions. Obviously a judgment call because of the trade-offs.
...
Also, in future it's possible that the tax rates will go up generally. 23% of something you actually receive isn't so bad... whereas zero percent tax on zero return is zero.

Right, I was interested in what people thought about the risk/reward tradeoff. "23% of something you actually receive isn't so bad" is exactly what I'm thinking.

My mother worked for a station that is now celebrating its 20th anniversary. She has still not had a liquidity event to cash out on all of the options she had been buying over the years.

Indeed, I feel quite fortunate to have had even the limited liquidity I've had so far.

[koshtra]

Yeah, I don't see any reason to hold that much risk. Sell it when you can!

[lutorm]

I thought I'd post an update, ~1.5 years later:

I've sold as much as possible of this private stock at every opportunity since I posted this (and paid an absurd amount of taxes), and the asset allocation at the end of the year looked like:

• 401k, IRA, Roth: $650k (+$120k)
• Taxable investments: $1360k (+$800k)
• Cash: $270k (+$220k)
• Home value: ~$300k (~0)
• Private equity: $1.4M (+$200k)

So this has taken the fraction of our NW locked up in this private equity down from 50% to 35%, which seems a lot less scary (but the darn paper valuation keeps going up so it's still more $ today than when I posted...) I'll just keep trying to sell...

[chagan]

"So this has taken the fraction of our NW locked up in this private equity down from 50% to 35%, which seems a lot less scary (but the darn paper valuation keeps going up so it's still more $ today than when I posted...) I'll just keep trying to sell..."


Good problem to have!

[MaybeBabyMustache]

Here's how I value the assets for my upcoming stock grants. I work at a large, international, publicly traded company, & ... it would take a collapse of the entire US financial market for them to be technically worthless. That said, I value them at zero until they vest each month & are sold. Otherwise, it would be a guess. That means I have just over $1M (at current stock price) of stock that I don't count in my net worth. Each month, as some vest & I can sell, I transfer this over, as my stock has liquidity always. In my case, I'll definitely leave some on the table, regardless of when I leave work, as I get additional grants each year. Therefore, the current unvested value is kind of meaningless.

For you, I'd take the same approach. When you have an opportunity for liquidity, sell as much as you can & add that to your net worth. Otherwise, I would consider the value $0.

[BicycleB]

Congrats, @lutorm! If I'm adding correctly, you're getting close to the point where you previously said you'd consider yourself FI without counting the private equity.

Good luck on the final countdown. Thanks for the update - keep 'em coming. :)

[lutorm]

Here's how I value the assets for my upcoming stock grants. I work at a large, international, publicly traded company, & ... it would take a collapse of the entire US financial market for them to be technically worthless. That said, I value them at zero until they vest each month & are sold. Otherwise, it would be a guess. That means I have just over $1M (at current stock price) of stock that I don't count in my net worth. Each month, as some vest & I can sell, I transfer this over, as my stock has liquidity always. In my case, I'll definitely leave some on the table, regardless of when I leave work, as I get additional grants each year. Therefore, the current unvested value is kind of meaningless.

For you, I'd take the same approach. When you have an opportunity for liquidity, sell as much as you can & add that to your net worth. Otherwise, I would consider the value $0.

Yeah I'm trying to keep telling myself that it's worthless, too...

So am I understanding correctly that you don't keep any of your company stock around, you sell everything as soon as it vests? It would be nice to do be able to do that, but on the other hand then I'm pretty sure I would have sold it all a long time ago and it would only have been worth a couple hundred k... So in that sense I'm happy that I've been forced to take this gamble.

[lutorm]

Congrats, @lutorm! If I'm adding correctly, you're getting close to the point where you previously said you'd consider yourself FI without counting the private equity.

Indeed, that's what we were concluding at our year-end inventory, too!  I'm in no hurry to leave my job completely, but I will probably try to go down to part-time for some "coast-FIRE" some time this year.

[MaybeBabyMustache]

Here's how I value the assets for my upcoming stock grants. I work at a large, international, publicly traded company, & ... it would take a collapse of the entire US financial market for them to be technically worthless. That said, I value them at zero until they vest each month & are sold. Otherwise, it would be a guess. That means I have just over $1M (at current stock price) of stock that I don't count in my net worth. Each month, as some vest & I can sell, I transfer this over, as my stock has liquidity always. In my case, I'll definitely leave some on the table, regardless of when I leave work, as I get additional grants each year. Therefore, the current unvested value is kind of meaningless.

For you, I'd take the same approach. When you have an opportunity for liquidity, sell as much as you can & add that to your net worth. Otherwise, I would consider the value $0.

Yeah I'm trying to keep telling myself that it's worthless, too...

So am I understanding correctly that you don't keep any of your company stock around, you sell everything as soon as it vests? It would be nice to do be able to do that, but on the other hand then I'm pretty sure I would have sold it all a long time ago and it would only have been worth a couple hundred k... So in that sense I'm happy that I've been forced to take this gamble.

I sell it monthly. I'm reasonably senior at my company, and trading windows are short, so I have auto sale set up. Note that I have grants vesting every month, so I'm more or less covered under the "risk" that the stock keeps appreciating. Plus, my husband & I both work for the same company, so much of our financial eggs are in the same basket. I don't need to add to that lack of diversity by hanging on to the stock. That said, the company I work for has been on a long growth trajectory, but is also very stable, so I've missed out on some money, but not 10x the current price or anything.

[ysette9]

Here's how I value the assets for my upcoming stock grants. I work at a large, international, publicly traded company, & ... it would take a collapse of the entire US financial market for them to be technically worthless. That said, I value them at zero until they vest each month & are sold. Otherwise, it would be a guess. That means I have just over $1M (at current stock price) of stock that I don't count in my net worth. Each month, as some vest & I can sell, I transfer this over, as my stock has liquidity always. In my case, I'll definitely leave some on the table, regardless of when I leave work, as I get additional grants each year. Therefore, the current unvested value is kind of meaningless.

For you, I'd take the same approach. When you have an opportunity for liquidity, sell as much as you can & add that to your net worth. Otherwise, I would consider the value $0.

Yeah I'm trying to keep telling myself that it's worthless, too...

So am I understanding correctly that you don't keep any of your company stock around, you sell everything as soon as it vests? It would be nice to do be able to do that, but on the other hand then I'm pretty sure I would have sold it all a long time ago and it would only have been worth a couple hundred k... So in that sense I'm happy that I've been forced to take this gamble.

I sell it monthly. I'm reasonably senior at my company, and trading windows are short, so I have auto sale set up. Note that I have grants vesting every month, so I'm more or less covered under the "risk" that the stock keeps appreciating. Plus, my husband & I both work for the same company, so much of our financial eggs are in the same basket. I don't need to add to that lack of diversity by hanging on to the stock. That said, the company I work for has been on a long growth trajectory, but is also very stable, so I've missed out on some money, but not 10x the current price or anything.

I did the same thing back when I worked at the same company as @maybebabymustache. :) and my husband sells his stock grants as soon as they vest each quarter. Yes, we pay more taxes and yes, it is possible the stock could go up if we held, but we want to get that stuff diversified as quickly as possible.

I also didn’t count any of my invested stock towards our net worth and walked away from  a six figure amount when I FIREd.

[lutorm]

• 401k, IRA, Roth: $650k (+$120k)
• Taxable investments: $1360k (+$800k)
• Cash: $270k (+$220k)
• Home value: ~$300k (~0)
• Private equity: $1.4M (+$200k)

In the series on nutcase investment gain, here's the end of 2021 update after selling a crapload of those employee stocks. (It's not super apples to apples because the wife and I have consolidated all our accounts and I'm not sure I included all her funds in the retirement/taxable before.)

• 401k, IRA, Roth: 980k
• Taxable: $1880k
• Cash: $355k
• Private equity: $1810k

So after selling $860k of private equity this year, I still ended up with $400k more than at the start of it. Nuts...

As for FIRE, I've gone down to half time this year and we're now planning on moving to Sweden some time next year at which point neither of us will have jobs! Then we'll see what happens...

[Malum Prohibitum]

Hawaii to Sweden - now that is a big change!

[ysette9]

Congrats on a wonderful year fiançially! Best of luck with the move to Sweden. I imagine it has a lot to offer over the US.

[BicycleB]

So after selling $860k of private equity this year, I still ended up with $400k more than at the start of it. Nuts...

As a kid, I was given a book featuring a sailor cook marooned on an ice floe. He made a magic pudding that got bigger no matter how much you ate. Congrats on the magic pudding!

[frugal_c]

Are you positive there is not a secondary market for the shares?  I read a few years ago about a company that was setting something up for exactly this situation.  I assume you already looked into it but if not might be worth some googling.

[lutorm]

Are you positive there is not a secondary market for the shares?  I read a few years ago about a company that was setting something up for exactly this situation.  I assume you already looked into it but if not might be worth some googling.

Yeah, unfortunately these stocks are restricted in that no third-party transactions are allowed (until an eventual IPO.) That's a condition you have to agree to in order to be eligible for stock grants.

[lutorm]

End of year update for 2022. Despite managing to sell off another big chunk of my private equity, it's still gone up!

• 401k, IRA, Roth: $840k (-$140k)
• Taxable: $2160k (+$280k)
• Cash: $200k (-$155k)
• Private equity: $2030k (+$220k)

We're still planning on FIRE this summer. Without that money machine, things would be looking a lot grimmer...

[Finances_With_Purpose]

Certainly a great problem to have!  Like others, I would continue counting it as non-existent until you cash it out.  I've had friends in these situations and many did not pan out or quit panning out at some point unexpectedly, so that's the only relatively safe way to value them when making life plans.  Sounds like you're near FI anyway, so kudos!   

[BicycleB]

End of year update for 2022. Despite managing to sell off another big chunk of my private equity, it's still gone up!

• 401k, IRA, Roth: $840k (-$140k)
• Taxable: $2160k (+$280k)
• Cash: $200k (-$155k)
• Private equity: $2030k (+$220k)

We're still planning on FIRE this summer. Without that money machine, things would be looking a lot grimmer...

Impressive numbers, @lutorm. Good luck with FIREing, and making the most of this abundance.