Buying options from working at a startup

[zaphod4prez]

I spent the last few years working at a startup tech company (it has not IPO’ed so there isn’t a market for the stock; last round was a Series B for a ~$250mil valuation). I recently left and am trying to decide whether to buy any of my stock options. Would love to hear people’s thoughts… I’ve tried to read as much as I can about this but still feel quite confused. My friends who also work at startups have been giving me conflicting advice.

I think that the company will likely continue to grow although I don’t trust management very much. I would be surprised if they didn’t at least get bought, but I wouldn’t be that surprised if they ended up w an unfavorable buyout. My main concern is that I don’t know the total shares issued bc company mgmt isn’t telling anyone… so like… how am I supposed to know how much my options are worth?(!)

Company

• The startup raised a Series B about 3yrs ago, for a valuation of around $250mil. The investors are reputable and well-known.
• They’re fairly large, with some major clients (incl Fortune 50 companies).
• We had layoffs during the pandemic but have recovered rapidly since 2021 started.
• I have concerns about company management, and the main reason I left was poor management, overwork, and a feeling that things were generally very disorganized and unstable.

My position

• I was employee ~150-ish so I don’t have a ton of equity.
• More importantly, I don’t know what % of the company I own! And management isn’t telling employees, as far as I can tell. 
• I have options to buy around 1,500 shares, w an FMV around 2.50, and my strike price is around $2. So my outlay would be around $3k in cash to buy the options.

Does anyone have experience to share about making these kinds of decisions? Or links/readings? Any and all thoughts are welcome!

[youngwildandfree]

I do! So first, it is very common for companies to keep the total shares issued private. It's annoying...but the idea is that the percentage of the company you own is really not useful data. They could always grant more shares and then that percentage would change anyway.

The number you should care about is the expected buyout value per share. If the company expects to sell at $10/share then the expected ROI is based on the difference between your strike price and the expected sell value. You can gather this data by looking at acquisition prices for similar companies in your industry.

Pretty much all startup companies are a mess (disorganized, poor management, overworked employees). I would not base my decision on that. At some level it's basically gambling because there are so many ways they could fail. The choice to buy is super personal IMO. For 3K I would ask how upset you will be if they are bought out and you get nothing. Do you feel personally connected to the tech? If you wouldn't really care or you want to wash your hands of the company, don't buy it.

[ender]

The nice part is it's $3k only you'd lose.

The downside is you'll probably not get much back.

It's a lottery ticket for $3k is the way I'd see it.

[Michael in ABQ]

I would look at it from an expected return perspective. Play around with the numbers below based on your knowledge of the company. I plugged in some values and came up with an expected return of $4,200. Those numbers are completely made up but you can see the concept.

What are the odds that it becomes entirely worthless? 25%?
What are the odds you basically break even? 50%?
What are the odds it doubles? 20%
What are the odds it goes up 10x? 5%?

$3,000 X .25 X 0 = $0
$3,000 X .50 X 1 = $1,500
$3,000 X .20 X 2 = $1,200
$3,000 X .05 X 10 = $1,500

Expected return = $4,200

If $3,000 is not a significant part of your net worth/liquid cash I would go for it. The downside is $3,000 loss but the upside could be buying shares at $2.00 that you could potentially sell for $4, $5, $10.

[Rdy2Fire]

The nice part is it's $3k only you'd lose.

The downside is you'll probably not get much back.

It's a lottery ticket for $3k is the way I'd see it.

Totally agreed! I have been there done that and lost the lottery but that's exactly what it is.

With that said, if you believe in the company, think they will grow, IPO, NOT devalue your shares significantly and the 3K is something that won't change your life, it's probably worth the gamble

[bacchi]

The nice part is it's $3k only you'd lose.

The downside is you'll probably not get much back.

It's a lottery ticket for $3k is the way I'd see it.

And, if the company collapses, the loss is tax deductible.

[zaphod4prez]

This was really really helpful, thank you all!! Thinking of it as a sort of lottery ticket is a great framing of it. The example calculation of EV is very helpful too.

Will have to think on this more.

[ChpBstrd]

I say go for it. Management is holding the same options you have the opportunity to buy, so there's a good chance the odds are in your favor.

Also, you probably spend more than $3k on things that are supposed to provide a thrill, such as a car with more horsepower than is necessary, a TV that offers a more thrilling movie experience than necessary, a computer or internet service that is faster than necessary, any motorized toy, or some manufactured object of infatuation. With these options, you could get years of entertainment and the possibility of life-changing wealth.

[seattlecyclone]

I have options to buy around 1,500 shares, w an FMV around 2.50, and my strike price is around $2. So my outlay would be around $3k in cash to buy the options.

How was this FMV determined? Was this the amount the Series B investors paid, or based on some more recent metrics? Based on the given FMV your options are in the money as of this moment. The question is whether you can trust the FMV to be accurate and whether you can expect the company to achieve an exit at or above the current valuation. It's a lottery ticket for sure. Trust your gut. If you think this company is going nowhere fast, pass. If you think they have a shot at further growth, maybe buy the shares if you can afford to put $3k into a risky illiquid investment for an unknown amount of time.

[MustacheAndaHalf]

I spent the last few years working at a startup tech company (it has not IPO’ed
...
I have options to buy around 1,500 shares, w an FMV around 2.50, and my strike price is around $2. So my outlay would be around $3k in cash to buy the options.

You mention $2 strike call options, which you need to pay $2/sh.  This could mean either of two things:
EXERCISE: you have to exercise the options now and buy stock.  You pay the strike price x number of call options
BUY CALLS: you're buying the call options, not the stock.  You pay $2/sh to get $2 strike calls, which breaks even when the stock is worth $4/share.

My guess is after you quit, your stock options expire a relatively short time after that.  So you have to exercise those options or they expire worthless.  If that's the case, you are paying $3,000 to get $3,750 worth of stock.  Although stock can be diluted by later fundraising, most companies grow faster than that.

It's probably better to do it.  You won't have to wonder "what if" if you buy and hold the shares, and it's only $3k.

[BicycleB]

Supporting MustacheAndHalf and SeattleCyclone here.

In my mind, half the value is you get the experience. Read the paperwork, make sure to exercise the options before expire. You'll have some new knowledge and get a war story to share. $ involved are affordable (I speculate there about your finances), odds of making a profit acceptable. Good luck with whatever you decide.

PS. Based on your screen name, you have my vote.