Stock Options

[wageslave23]

My SIL just got laid off from a startup tech company because they brought in new management to take the company public. She has 90 days to decide whether you purchase her stocks for $60k. She would also have to pay AMT taxes of $60k in the first year. The consensus is that the company should go public in the next 1 to 2 years. At which point the stock could be worth a million or more. Does anyone have any experience with this stuff. She's spoken to a couple financial advisors that weren't that helpful. Also, they only have about $30k cash to invest so they would need to borrow the rest. One company tentatively offered to loan the initial $120k for basically 25% of the payout plus the original loan amount. And if the company goes bankrupt they would owe nothing.

[TimCFJ40]

Borrowing money to buy $60k private stock in a company that just laid you off sounds like a really bad plan. 

Sure, that could be a big winning bet, but being that she doesn't even have the money to buy the stock outright means she doesn't have the margin to make that bet. 

Sure, the new management COULD be put in place to clean things up to go public.  They could also be arranging things for a bankruptcy, or generally be inept and flounder around and ruin the company. 

Bottom Line, even if the odds are VERY GOOD that she could hit a big payday, throwing her last $30k in liquid assets as well as $30k of debt after that bet is IMO a  very foolish position.  If she were my SIL, I would advise her in no uncertain terms to hold her cash and move on. 

[hooplady]

I'm a little confused. Is it purchasing stock, or exercising options? If the latter, then my experience is that most people turn around and sell them right away in a cashless transaction. Depends on the nature of the grant, there could be restrictions. Are the options under water?

[hooplady]

I guess she could be wanting to do an "exercise and hold" transaction, but then it's no different than gambling on any other stock that you think might increase in value.

[TimCFJ40]

I'm a little confused. Is it purchasing stock, or exercising options? If the latter, then my experience is that most people turn around and sell them right away in a cashless transaction. Depends on the nature of the grant, there could be restrictions. Are the options under water?

I'm not an expert, but it sounds like the options are for shares of a private company that she can chose to buy or not in the next 90 days. 

Unlike a publicly traded stock and it's options, there likely isn't a delta between the option price and the current market price, as there isn't a public market price.  That delta is what yields either "underwater" or some value to be reaped from a cashless transaction. 

[wageslave23]

She must exercise her options within 90 days of being terminated.  She can't easily turnaround and sell until it goes public.  Current value of her shares is $250k, hence the $60k in AMT taxes owed in addition to the $60k exercise price. $120k total needed to exercise options. I'm only looking for advice from someone who has gone through this before. 

[Bruinguy]

One company tentatively offered to loan the initial $120k for basically 25% of the payout plus the original loan amount. And if the company goes bankrupt they would owe nothing.

If the bank/advisor is willing to make the sale of the stock the sole recourse for the loan—-I.e, they would never come after your sister or her other assets, then this could be worth looking into, especially if she decides it isn’t worth putting her own assets at risk.

May be worth having a lawyer review the docs though to be sure she’s getting what she expects in the deal.

[stacheasaurus]

Posting to Follow. In a similar situation.

[hooplady]

I'm a little confused. Is it purchasing stock, or exercising options? If the latter, then my experience is that most people turn around and sell them right away in a cashless transaction. Depends on the nature of the grant, there could be restrictions. Are the options under water?

I'm not an expert, but it sounds like the options are for shares of a private company that she can chose to buy or not in the next 90 days. 

Unlike a publicly traded stock and it's options, there likely isn't a delta between the option price and the current market price, as there isn't a public market price.  That delta is what yields either "underwater" or some value to be reaped from a cashless transaction.

Oh duh on my part...totally different situation for a private company where FMV is likely difficult to measure.

[reeshau]

One company tentatively offered to loan the initial $120k for basically 25% of the payout plus the original loan amount. And if the company goes bankrupt they would owe nothing.

If the bank/advisor is willing to make the sale of the stock the sole recourse for the loan—-I.e, they would never come after your sister or her other assets, then this could be worth looking into, especially if she decides it isn’t worth putting her own assets at risk.

May be worth having a lawyer review the docs though to be sure she’s getting what she expects in the deal.

Yeah, as long as the deal is on the up-and-up, I think the contingent loan sounds like a good deal.  They can't do it without, so it's $0 or the chance at 3/4 of $1M.  It sounds worth sharing the bounty of someone willing to foot all the risk.  (What your SIL is providing them is access to the deal)

It's worth having a lawyer look it over, though.  Too much to make a penny wise, pound foolish mistake.

[wageslave23]

One company tentatively offered to loan the initial $120k for basically 25% of the payout plus the original loan amount. And if the company goes bankrupt they would owe nothing.

If the bank/advisor is willing to make the sale of the stock the sole recourse for the loan—-I.e, they would never come after your sister or her other assets, then this could be worth looking into, especially if she decides it isn’t worth putting her own assets at risk.

May be worth having a lawyer review the docs though to be sure she’s getting what she expects in the deal.

Yeah, as long as the deal is on the up-and-up, I think the contingent loan sounds like a good deal.  They can't do it without, so it's $0 or the chance at 3/4 of $1M.  It sounds worth sharing the bounty of someone willing to foot all the risk.  (What your SIL is providing them is access to the deal)

It's worth having a lawyer look it over, though.  Too much to make a penny wise, pound foolish mistake.

I was going to loan her money so that she could buy half in exchange for letting me buy the other half. But this deal sounds better for her, and I don't think I want to match their offer. It's a non-recourse loan so they cannot go after her other assets if the stock drops to zero or doesn't cover the initial loan amount.

[reeshau]

I was going to loan her money so that she could buy half in exchange for letting me buy the other half. But this deal sounds better for her, and I don't think I want to match their offer. It's a non-recourse loan so they cannot go after her other assets if the stock drops to zero or doesn't cover the initial loan amount.

Also, if the deal went bad, would you expect to be repaid?  Even if you said no, would SIL feel obligated?

That's why blood and money don't mix well.

[beee]

One company tentatively offered to loan the initial $120k for basically 25% of the payout plus the original loan amount. And if the company goes bankrupt they would owe nothing.

This sounds like a very good deal. You can get 3/4 of the payout minus $120k with no risk.

[Ron Scott]

I worked for a privately held company whose stock value was assessed quarterly by a paid advisor for about a decade before we went public. The only legal buyer was the company and it was not obligated to buy. I borrowed heavily for 4-5 years to exercise-and-hold all options on the day they vested. I did not want to sell any shares to pay the tax and did not want to delay acquiring shares I was vested in. It was the best financial decision I ever made and changed my life forever.

The reason it was a good decision was simple: The stock grew steadily prior to the IPO and then took off nicely into the public market.

If the stock dropped my family would have been gravely affected. But it didn’t.

And there’s the thing: You don’t need to know all that much about the administrative workings of options or private vs. public markets. You’re just betting the stock will rise, period.

I knew the company, the industry, and the competition. I felt at the time I made the right decision. It was a risk that seems scary to look back on but acceptable then.

All that said, I have zero advice for you because I don’t know the company and that’s all that matters.

Now I’m a 60-40ish investor. You can operate on knowledge and belief when you work for the company you’re invested in, but to gamble on the stock market in general takes “faith”. That I do not have.

[rantk81]

Why would that "company" offer to "front" all the money for the investment, but give up most of the up-side?  Presumably, if they wanted to take a stake in that company, they could just invest in it with private equity, and retain all of the up-side?  That situation makes no sense to me.

[Omy]

Both DH and I got burned by scenarios similar to this (at 2 different companies before we met). We exercised our options, paid our taxes, and when we were able to sell in the future, the stock price had fallen substantially in both cases. (His went to $0, and my proceeds didn't even cover the taxes I'd paid the year before).

I'd consider the company that will cover expenses in exchange for 25% of the payout...but it sounds too good to be true.

[reeshau]

Why would that "company" offer to "front" all the money for the investment, but give up most of the up-side?  Presumably, if they wanted to take a stake in that company, they could just invest in it with private equity, and retain all of the up-side?  That situation makes no sense to me.

I presumed that the company was paying for access--just because you have money doesn't mean you are invited to the table.  However, if the options are mature, they may be at a much better price than the current funding round, as well.

[dhc]

OP, I've not got through this personally but I've considered a couple of job offers where something like this seemed like a likely possibility. A few things that weren't entirely clear to me from your post, that SIL should clarify before deciding:

• Is the investor fronting the AMT money, and are they calculating that in the same way SIL is?
• What if the IPO happens at a price where SIL's 75% of shares aren't worth the entire loan? Does she owe the remainder, or is any repayment contingent on her shares eventually paying out at least that much?
• Is interest added to the expected repayment amount? If so, how does the interest rate compare with other loan options she might have?
• Is the investor willing to buy her resulting shares outright? If so, how much are they offering? It seems like the current offer is a $120k loan in exchange for $60k of shares and an obligation to repay the $120k; might they instead simply pay her $120k for half of her shares (worth about that at current value) or buy all of her shares outright for the $250k current value? Depending on her current situation and her outlook on the company's likely IPO, that could shift more of the risk/reward to the investor and away from her, which could be good or bad.