Tag Archives: stock options

My $20,000 Lesson: Stock Options are BS

It’s been a while since I covered the bullshittery of startup stock options on this blog, but today life had led me to needing to put out a distress signal to anyone who doesn’t quite understand how they work and why they are really a load of fancy horse manure, slightly more valuable than a handful of lottery tickets.

What’s worse is those lottery tickets come with a price. I’ve explained this on my blog before, but feel like it’s necessary to cover this topic one more time, just to make sure that the point is clear.

When you join a startup, part of your total pay package is in stock options. For the sake of simplicity, let’s say you are a new employee, relatively senior, and you are going to be given $100,000 in total compensation. That compensation will not be all cash. Say you get $70,000 in cash, $30,000 in options. The value of those options is really where the bullshit factor begins. Options are priced at what the investors think the company is worth. The earlier the company, the lower the “valuation” (i.e. price the investors think the company is worth), but also there’s a lot of guesswork involved as well. What is the company going to be worth when it sells? How can anyone know that before the product is tested and it’s clear that people actually want to buy that product for the long term? Continue reading

My (Potentially) $20,000 Mistake

It’s been said a prudent investor should limit the value of one stock to a maximum of 10% of their total portfolio. Usually it’s advised that one is even more diversified, especially if that stock is a small cap. I haven’t found advice about private companies because at that point wealth managers are generally advising angel investors with over $1 Million in networth to their name already. It’s really hard to find good advice for startup employees trying to figure out what to do with ISOs (incentive stock options.)

ISOs are a type of employee stock option that can be granted only to employees and confer a “US tax benefit.” They are also called Qualified Stock Options by the IRS. Tax benefits provided by the IRS are typically designed to encourage regular folk like myself to take minor risks in order to obtain higher value down the line. For example, the IRS allows the average joe to put pre-tax money (up to $17,500 a year) into his 401k, which, theoretically, is taxed at a lower rate during retirement.

For ISOs, the benefit can be huge if and only if the employee takes the risk to exercise early via an 83(b) election and the company does extremely well. The problem is that the risk that the employee is required to take is much, much larger than that of someone investing in a 401k. When you invest in a 401k for $17,500 per year you usually have an array of mutual funds that you can select so you have a diversified investment. If one company goes under, your investment will take a hit, but you won’t be down to $0.

Now, with ISOs, it’s a different story. If you join a company as an early employee you’re often sold the dream of the company hitting it out of the park, and those stock options being worth much more than they’re worth today. That’s how startups entice talented folks to leave big corporations to work for less money and much longer hours. Sure, there’s the flexibility, the excitement of building something new, et al, but if stock options weren’t a key part of that recruitment package they wouldn’t exist in the first place.

Some people do strike it rich on options. But the matter of fact is, 9 out of 10 startups fail. It isn’t clear how many of those 9 startups go to $0 and how many of those 1 in 10 actually return anything significant to common shareholders (i.e., the employees.)  I know for a fact that a certain $1 billion acquisition returned around $1 per share to common shareholders, while an acquisition of just a few million over what was raised returned $3 a share to common shareholders. The numbers never make clear sense.

With ISOs, you’re provided the benefit of early exercising. I’ve written a bit about this before, but basically, early exercising means you “get” (benefit) to BUY your shares right away. Why would you want to do this? Well, say you have the option to buy 10 shares for 1 penny each today, even though you don’t actually own any of them until one year down the line because you have 4-year vesting with a one year cliff, standard terms for founders and early employees. This means that whether you buy your options or not, you don’t actually have the right to any of them until one year of service. If you quit before that time, so long options.

But it gets more complicated. After the one year of service, every month you vest a percentage of those options, until year four. The company may or may not be sold or go public during this time. Companies, even successful ones, usually take much longer to go anywhere. Many of them have ups and downs and ups and downs on the way. The ups are great. The downs sometimes include investors coming in to give more money to keep the company afloat while washing away any potential gains of common shareholders. That’s one reason why successful companies may still not even provide expected returns to employees who have worked long and hard for their reward.

So why exercise early? Exercising is actually a taxable exercise. Companies gain value, albeit paper value, as they grow. So if you received 10 options for 1 cents a share in 2013, you can buy them in 2013 for 10 cents a share and pay no tax on these options. Say in 2015 your company is supposedly worth $1 per share. If you want to exercise them at that point, you have to pay tax on 99 cent gain per share. That’s not much. But if you own hundreds of thousands of shares, and the difference between the exercise price and the current value is much greater, you’re looking at a sizable tax bill for assets that are entirely illiquid and may be for the foreseeable future. Long story short, if you want to get any of the potential value out of your stock options, you probably should exercise early if your company lets you. Exercise early and pray.

Now, you’re thinking, why not just wait until a long time in the future when the company sells to exercise my options vs taking the risk today? You can certainly do that. The only problem – and it’s a biggie – is that makes you stuck if you want to leave the company or if you are forced out. You have 3 months (count ’em, 90 days) to exercise your options, or you give them up. At that point, even though the company may be doing well, you are looking at a taxable event if you want any of those options you negotiated so hard for and earned during your tenure at the company. You’re stuck with a psychological battle here — do you buy the options, pay tax on them, because they were part of your compensation package, accepting that they very well will be worth nothing after you’ve paid a heap of tax on them – or do you let them go and accept that one day they might be worth a lot and you won’t see a penny of it?

Yes, that’s the problem with ISOs. Worse yet, when you join a company early on, you don’t have to exercise your options, but when you’re a small team — unless it’s clear you just cannot afford to exercise those options today — people you work with like to see your skin in the game. If you’ve exercised your options, you’re an investor in the company. Yes, your fancy benefit for working for a startup is that you get to pay to invest in a company that has a 90% chance of failing.

The later you join a startup, the chances of failing might go down ever-so slightly, but the cost to exercise the options go up. No matter what, it’s a crapshoot. Like in Las Vegas where the Casino always wins, in startups, the investors always win, even if they lose. Founders have a slightly higher chance of walking away with a piece of the pie, even in a failed outcome, because they have so many shares the investors often want to buy them back from the founder so they can control the company. Founder gets a few million for selling their shares back, leaves on his merry way. Early employees are pretty much fucked.

That’s just the way it is. Few people understand this, or the odds. I joined an early-stage startup and paid $20,000 to exercise my options. Yes, this was a huge risk. Our CEO would rattle off numbers of our shares one day being worth something between $35 and $65 a share in company meetings. He got us all excited because that was his job and at the time we all had to be a bit delusional to grow the company from nothing to something. But I fell for it. I wanted to. I wanted to buy the startup lottery ticket and, while I knew the $65 per share was a long shot, I dreamed of walking away with enough for a down payment on a house. Couldn’t my 100,000 shares turn into $200,000? The fantasy was always $1M, but I kept myself grounded in reality, worked hard, hoped that maybe all my hard work would result in $2 per share. Just $2 per share.

Today, everything has changed. We have a new leadership. There’s no CEO standing up and talking about employee share price anymore. I’m pretty sure that’s one conversation the executive team wants to avoid. And I’m just an early employee who put 10% of her networth into one very early-stage company. If someone came along and asked me to invest $20,000 into a Series A startup today, and if I was legally allowed to, I don’t think I would because the risk is too high.

Angel investors (and VCs for that matter) would never invest in just one risky company and call it a day. For more seasoned executives, buying a chunk of a small company to exercise their stock options may be a much smaller percentage of their portfolio, so that’s a different story and a different risk allocation – what’s 10% of my portfolio could easily be 2% of an executive’s portfolio who has a lot more money and assets saved up.

That said, I encourage everyone thinking of exercising their options to be realistic about the risk involved. It’s not like buying an expensive lottery ticket exactly, or putting it all on roulette red, but there are risks involved, and yes, you can and very well may lose all or some of your investment. Venture Capitalists do not care about employees or their cute little stock. They care about not losing money and making money. If you’re working for a company that is going to raise a lot of money and wants to grow fast (once you take any VC money this is kind of a given) your stock is most likely going to be worth very little to worthless. Unless you happen to hit the jackpot.

 

 

 

Faux Golden Handcuffs: A Tale of Startup Stock Options

When you join a startup as a full-time employee, part of the package includes stock options. It is actually kind of funny how these are presented, as most employees choose to work for a startup for a lower salary than what they’d make at any large business, and in exchange for this lower salary they get some number of options. That sounds fancy, but really what it means is that when you join the company, you’re provided the right to buy X number of shares at their current strike price.

Now, if you join a company very early on, this strike price could be extremely low. For instance, if you get options valued at 5 cents per share as one of the first 10 employees of a company, and one day the company sells for $5 a share or IPOs at this rate and holds it value for a 6-month no-sell period, you have a sizable profit per share, even after taxes. So if you had 1000 shares you’d make $5000 minus the $50 you’d have to pay to buy the stock options. Minus your tax rate, or if you exercise early (will explain below), a lower tax rate. Not bad, you did pretty well for yourself. Especially if you negotiated many more than 1000 options, say, 100,000, or 200,000. Suddenly a $5 sale price could be worth millions. Hence, the golden handcuffs.

But these handcuffs are fuzzy. Because besides the company having to be successful against very tough odds, there are so many other variables that go into the value of the options that few startup employees understand. Executives use this to their advantage in hiring talent on the cheap, and employees get to dream of being part of building something that could contribute to their financial freedom, or at least financial flexibility. Usually, this is just a dream. And you don’t know what those options are worth until an event many years into the future, possibly after you left the company.

Stock options are designed to keep employees around when they can go off and get a better salary some place else. They are not really designed to the benefit of the employee, though in the rare occasion when a company does well they can make the employees wealthy. There are a lot of companies that fail, very few that are huge successes like a Google or Facebook, and many more that quietly get acquired for cents on the dollar, with employees lucky if they see any increase in value on their shares. Sometimes these acquisitions are considered a success for the business, and the executives and investors profit from them, but common employees with their common stock are screwed over.

I witnessed this first hand at my last startup where, in an acquisition, I was provided the option to either sell back my handful of shares for $3 per share, or trade them in for shares of the acquiring company which were then valued at $16 per share. However, due to the acquisition terms, only accredited investors were legally able to accept the second option. Basically, you needed $1M in networth in order to trade your options in for the $16 per share opportunity. The deal that was struck was clearly designed to benefit the executives (all who were already millionaires) and not the common employee.

I didn’t complain here, however, as I had few shares and wasn’t planning on buying them – they were a gift to me upon my layoff. I walked away with a small bonus that got me through until my next job, but what I gained was the learning that options are never ever worth what they should be, and executives will do whatever it takes to bullshit you into believing their potential so you work your life away to help make them rich. Yes, the executives usually get rich well before the company sells, between their larger salary and cashing out a little in each round. But the common employee, who thinks he has this great opportunity to one day see some form of wealth, is largely deluded.

The Problem with Stock Options

  1. You have to buy them. You are given the right to buy stock options at a specific strike price. If you are a very early employee, this strike price may actually be pennies on the dollar and cheap enough to buy up front.
  2. If you don’t buy them up front (exercise early) then you have a big problem. The price of the stock will likely go up and when you do decide to buy the shares, you have to pay taxes on any interest between your strike price and the cost of the shares.
  3. You can wait until the company gets acquired or goes IPO to sell the shares, but then you have to pay alternative minimum tax on the difference. So you might pay 15% on the gains if you exercise early and 45% if you don’t. That could be a huge amount, if your company happens to be one of the few to hit it out of the park.
  4. But, if you exercise early, you don’t actually have all of your options if the company were to sell tomorrow. Most companies offer a vesting schedule. That’s a fancy term for, you don’t actually get all of your stock until you’ve worked for us for 4 years. In fact, the typical vesting schedule requires you to work for a year before accessing any of the stock, and you’ll get 25% of your shares up front and then vest the rest monthly over the next three years.
  5. If the company sells before those four years, you won’t have all the shares you were promised, even if you exercised / bought them early, unless the executive team is able to negotiate this into the contract. This would be rare for the executive team to care about their employees this much.
  6. For very early employees, this is less of a risk because it takes a while for startups to get acquired or IPO – but four years is still a long time in startup years. Instagram was acquired by Facebook for $1B when in business for under a year. So it happens. But is rare. It’s more of an issue with later stage startup employees who come in when the strike price is higher (it typically goes up with every round of funding, which is a good thing for the business, but bad for the later-stage employee) and then the cost to exercise shares is too high while they are still stuck in their deluded golden handcuffs.
  7. Later stage startup employees figure out that their options aren’t worth that much. They don’t get as many as the earlier employees because the earlier employees are given more as part of taking a risk on the young company. This makes sense to motivate early employees, but there comes a time in every startup where they are still limited on cash but aren’t able to give away as much low-price stock options, and hiring becomes a huge challenge. What’s more, later stage employees are less loyal because they know their chances of achieving any sort of wealth from the company are lower than going off and joining another startup as an earlier employee.
  8. All the time I hear people say at various startups “I’m waiting until my 1 year to leave.” This doesn’t make a lot of sense and shows just how little startup employees understand options. Stock options must be purchased within a few months of leaving the company, or they disappear. So if you decide to leave after a year, you will have a right to purchase 25% of the stock you were promised, for the strike price you were promised, and you have to pay taxes on the difference.
  9. However, if you stay at the company until an event, you don’t have to buy the options, you can wait until the event. So once the price of the options goes above the strike price you have to decide — is it worth paying for the options (which could be worthless in the future) and tax on their supposed current value that you aren’t allowed to sell them for? This is where options get really shady in my opinion.
  10. What’s worse is sometimes the value of the stock goes down. For example, an employee may join a company and be offered stock options with a strike price of $2 per share. She may decide to wait a year to be able to purchase 25% of the options and then leave the company. But after a year, it’s possible the stock price went down to $1.50. She now has options that cost $2 a share to buy but she’d only actually be getting stock worth $1.50 a share. This means she’s underwater and has a really tough decision to make. After staying out her year, does she exercise the options with the hope that one day they will at least be worth $2 per share or more in the future? And if she believe that they will be worth a lot more in the future, why is she leaving the company? Now she gets to vest monthly, so it’s easy to think “I’ll stay just another month” to obtain more shares. But this doesn’t change the fact that the shares are worth less than she would have to pay for them today, so she actually can’t leave the company. She’s seriously handcuffed.
  11. If you got in early and have a lot of shares to vest, you may actually be able to see some profit from them if the company is doing well, but this isn’t a sure thing. What you give up for this chance is flexibility in your career. If you love your job at the startup and have opportunities for growth then life is perfect. However, you are pretty much stuck in your job for four years to have access to all of your options. As I mentioned, four years in startup time is a very long time. A company you once loved working for will change. This is a natural part of business and change can be good. When you were part of a 1-20 person company the experience maybe was challenging but it likely felt amazing being part of a small team. If your company is doing well, then you may find that suddenly you look around and you’re working for something that looks exactly like the corporate culture you were trying to get away from. And you have to stay there for the 4 years to access your options.
  12. In addition to this, if you got in early and have a lot of options, you’re going to inevitably run into a big problem, especially if you’re not a VP. New management will be brought in above you and while they may have negotiated a package with a sizable amount of options as well, chances are their strike price will be higher than yours. So, if the company is doing well, your manager will ultimately be jealous that you have a lot of stock at a low strike price. If the company is doing poorly, the manager can hold the fact that you have a lot of stock over your head instead of giving you a raise, saying that you have more stock than other people in the company do and you should be grateful for that. No matter what, even if the stock options might be worthless one day, the options you received early as a risk for joining a pre-funding company or Series A company are seen as part of your total pay package… which means you probably will never make the salary you deserve, and your stock options may still be worth nothing in the end.
  13. Besides the culture challenge, the larger issue is if you’re giving up opportunities for professional growth in exchange for the hope that the stock options may one day be worth something. Again, if you like your job and can negotiate enough in terms of raises to be making near what you’re worth, then by all means, stay. But startups are unlikely to give you raises to meet what you’re worth in the market. Especially after two or three years, you’ve gained a lot of experience and that experience is more valued in another company. So you’re faced with the conundrum: stay where you are, or use this experience when the company is doing well to land another position.
  14. You can always go land another position and start over, getting stock in another company, but then this whole thing repeats itself. Maybe one day you’ll get lucky. Maybe you won’t. But you continue to be deluded into giving up the benefits that larger companies offer, like 401k match, healthcare (most startups don’t get health packages until they’ve grown to a certain number of employees, and they will not be the best health packages), opportunities for growth, etc.
  15. After you’ve been at a startup for a few years, you start playing the numbers game. For example, when you are 2 years vested, say, of 100,000 shares, and say you exercised early, you own 50,000 shares. If you stay two more years, you will own 50,000 more shares. For the sake of simplicity, let’s say you paid $.10 per share, so you paid $10,000 to purchase the shares. If you leave today, you actually get $5k back because those shares are not vested. You officially own the 50k shares. Let’s say the company does ok, but it isn’t a runaway success. The company sells for $3 a share. This isn’t bad at all and is a pretty good case scenario. You’ve made a $2 per share profit. So your 50,000 shares are now worth $100,000. But at your two years vesting mark, you look at the next two years don’t know if the company will sell for $3 per share, or $5 per share, or $20 per share, or $0 per share. If you think the company is doing well and that there’s a chance it will sell for $3 per share, then you must determine is $100k for the next two years worth it in exchange for the opportunity to move into a more senior position at another startup or to move into a larger company where the $100k difference will quickly be made up with increased salary and opportunities for growth.
  16. Still, in the back of your mind, you see that there is still a chance, albeit a tiny, tiny, tiny chance, that the stock will be one day worth more. Even though you also know there’s just as much of a chance, probably a better chance, that it will be worth $0, which at this point you actually lose all the money you paid to exercise early to buy the stock. Because even though stock options are part of your pay package, they are still an investment. This is not a big deal for the executives who likely are already millionaires, where putting down $50k on a startup is not a huge deal. But for the common employee, she may pay $5k or $10k or $20k to obtain these options, if she negotiated for a lot of options and the strike price is higher that price goes up.
  17. Employees may receive additional stock grants but just like later-stage employees they get the grant at the price the stock is valued at when they receive the stock. And these grants are usually subject to the same vesting schedule as the earlier stock, so you have to stay one year to earn the right to buy 25% of the total offer.
  18. What’s worse is what stock options do to motivation within a startup company. Later-stage employees, after the first 25, are not offered as much in terms of stock options unless they are a very key strategic hire. If the employees are talented, they quickly realize they could be paid more or get more stock options in another organization. If they aren’t talented or motivated, they may not think about this or care. But the best employees are smart, and they know that their offer of 5000 shares and below-industry pay is not worth trading in for the opportunity to advance their careers elsewhere. So unless your startup culture is amazing and your product is selling like hot cakes, people start to leave. And once the good people start to leave, it’s a trickle effect. Retention becomes a huge issue — and you can’t do anything to stop the bleeding because you’re hoarding your cash in case the business needs it, and options are now too expensive to benefit the employee.

There’s more to the problems with stock options, but these are just a few of the issues which few employees know until it is too late. It’s important, then, to always be true to yourself, and don’t fixate on the dream of wealth as a startup employee. Make sure to join a company that you believe in because of its mission, it’s executive team, and the role you will get to take on.

But I have less advice for someone who is an early employee and somewhere in the middle of vesting. What makes me saddest of all is the death of the company culture. I could work for lower salary than I’m worth with a sizable amount of stock options when I felt like I was part of growing something from nothing with a small team. As hard as it was, I loved it. I loved coming to work and knowing that the people I worked with were all as passionate as I was to build a business. When the company gets larger, even past 50 employees, that culture dies. People join the business at this point because they hear it’s a hot startup or the salary offers went up. They are less devoted to the business. It becomes just a business, no longer a dysfunctional family, and often times a dysfunctional business – natural for a company with growing pains, but uncomfortable.

As of August 1, I am 31 months of 48 months vested. I see other employees who joined around the time I did starting to pack their bags. This shows me that others — who probably know more than I do — don’t have the same faith they once did in the company. What the executive team has to tell its minions and the truth are often two very separate realities. What was a transparent, small culture, is now one filled with corporate politics, back stabbing, and other traditional business practices. It makes me uncomfortable and unhappy. I miss being in a smaller company. It’s worth the smaller salary to be part of that culture. But now, I face my own conundrum: do I stay and if I do stay why am I staying?

Reasons to Stay or Not Stay…

  1. Stock Options: At this point, I try to not be too deluded into thinking the shares will be worth a lot. At a conservative pricing I would estimate my remaining shares could be worth anywhere from $0 –  $335k. Now, $335k may be reason to stay for another 1.5 years, as it would be impossible to obtain another offer where in 1.5 years I would make that much. But the $0k and everything in between is very much a possibility. So one must ask herself, what are the odds of that, and are the odds better to trade back the remaining shares and move to another startup where this risk can be better diversified? Meanwhile, there is always the very, very, very small chance that the remaining stock options could be worth $335k+. No one knows what they’ll be worth.
  2. Opportunities for Growth: Which are pretty much non-existent. Even if they were existent, I’ve discovered that my current field is not the one I’d like to stay in for my career. I’ve been able to gain some experience in other areas in this role, but I still worry that I’m trading years of experience when I could be working in more junior positions in product management or pmm or digital strategy for time building myself up to be a VP of communications, which I don’t want to be. The real opportunities for growth at a startup are in engaging with projects that you don’t have experience with that no one else wants to do. But my boss doesn’t like it when I get involved in things outside of my basic tasks — which I understand, that is my first priority — but the opportunity to learn new skills and make myself more flexible for future roles is one of the best reasons to stay. It takes a lot of energy and careful wording to be allowed to work on projects that are not directly benefiting my department’s goals.
  3. People You Work With: This is the hard one. There are still many people I work with who I like a lot. While the small family culture has died, it’s still fun to be part of the early kids club, and to share this with other employees. But the early kids club is slowing leaving and the new kids club has taken over. I like the new kids too, but it’s just, different. And I like working with the crazies that are drawn to early-stage startups. I don’t mesh well with corporate executive types. I don’t play that game well. I could put all of my energy into playing that game, but honestly, I’d rather just be good at my job and get shit done. It takes too much energy to handle the bullshit that is the typical business.
  4. Corporate Culture: It may be asking for too much, but my company once had quarterly events where we’d do fun things and really bond together. Coming to work everyday, while we all worked very hard and were exhausted by all the work, felt a bit like coming to a camp where we were teaming on working on an exciting project. I was very insecure at the time in what I could offer the business, but even that made me work harder, and for the most part, I loved it. We were all in the same boat together on an exciting adventure. It wasn’t perfect either, but it was a true startup, and it was a place where we could all be ourselves without worrying if something we say or do looks unprofessional and will haunt us later on when it comes time to determine promotions and raises. Meanwhile, what makes me the most unhappy is how once a company grows each department feels like it works within a silo. Everyone is working towards the same goal but it doesn’t always feel this way.
  5. Industry/Company: Do you like the industry you’re in, and the opportunities for the company? Do you believe in the product? Do you think you are part of something that is changing the face of something? Well, it’s pretty exciting to be part of a business that is working with many other businesses. I’m learning a lot overall, but limited in opportunities to interact with our customers. It’s still an exciting industry, although at this point in my life I’d like to work for a company in the wellness or education space, that is designed to help people vs just to make money. Though making money is good too.
  6. Salary: In my current role, I’m confident in another business, even another startup at our stage, I could be making $20k – $30k more per year. So I’m not staying for salary.
  7. Loyalty: Loyalty is overrated. It’s overrated because you can be let go any day, and no one would bat an eye. You may think you’re doing just fine and suddenly your company’s board of directors decides that it doesn’t need your role, or it wants to replace you with someone else, and you’re gone. If your company doesn’t show signs of loyalty, you shouldn’t be expected to either.
  8. Flexibility & Benefits: Does the job enable a flexible work schedule that fits your life? Are the benefits pretty good or unique (do you get to take a yoga class in the middle of the day that you wouldn’t be able to do at another job?) I don’t see any major benefits at my current company that would make me want to not leave.
  9. Feeling Successful: Ultimately, the largest question is, “are you set up for success?” In a startup this is a challenge because hiring is always on the lean side. You are expected to work harder and longer hours than if you were at a regular company, this comes with being part of a startup. But there also is a point where you step back and have to analyze if you’re set up for success. Much of this is outside of your own control. Maybe your management doesn’t understand how to help support your success, or they do, but their hands are tied because of their own corporate politics or sheer realities of the business’s bank account. After years of feeling like you can never quite achieve success, it takes a toll on you. I get bored when my job is easy, but I’m not sure how much longer I can handle it being so hard, just without the right resources to feel successful.
  10. The 5 Year Question: does staying in this job now get you where you want to be in 5 years vs other options? In 5 years, I’ll be approaching 35. Where on earth do I want to be in my career or life at this point? The reality is, I’m not sure. If I stay for 1.5 more years in my current role, work my ass off, help the company grow, and ideally be rewarded for this in some form in a company acquisition or IPO where the stock options are worth more than I paid for them, does this help me get to where I want to be in 5 years or not? My biggest concern of all is that the quality of my work suffers when I’m burnt out. I don’t get burnt out from working all the time, I get burnt out from feeling the need to spend energy engaging in corporate politics vs just getting work done. But worst case scenario my work suffers because I’m caught up in this, and suddenly the positive sentiment held about my work is gone. While my job encompasses a lot of tasks that I’m sure no one sees or understands (ghostwriting an unlimited number of contributed articles to secure press coverage because most publications don’t actually pay enough reporters anymore to create their own content, website creation and management, lead generation via web marketing, web advertising, brand strategy, award applications, speaking applications, coordination with customers and partners around their communications strategies and collaborating to this effect, customer communications, et al)  I know that “all I need to do” is secure dozens of press hits with the help of my PR firm with an occasional piece in a tier 1 publication, and everyone will think I have my act together. But that in itself is very challenging. It requires a great deal of coordination between our customers, strategy, and ultimately luck in that reporters are still interested in covering the industry. I’m sure some brilliant PR strategist could figure out how to land the front page of the NYT, but I’m not a brilliant PR strategist. I want to build great products.

So… this all leaves me with… no answer. I think the answer comes in every time I watch a colleague of mine leave the business. But ultimately I believe that my work on a day-to-day basis has a direct impact on the success of the business. Every article my team lands makes us more attractive in the eyes of future stockholders or acquirers. At the same time, would leaving to make room for someone more seasoned at this stage company and PR strategy enable even better success in this area, helping lift share price while also enabling me to pursue my dreams of being somehow involved in product strategy and design? Who knows. I doubt there is anyone out there willing to work for the price I do and do all the jobs I do and care as much as I do. But there probably is. There’s always someone smarter and better and willing to work for the same or less. The question is, will my company be able to find that person. And, should I care?

Get Rich Quick…. Quicker… Quickest

On the eve of Facebook’s impending IPO, and all the buzz about the winners of the mega millions jackpot, the rest of us are left to attempt to build wealth out of our monthly savings. At the Personal Finance Conference a book on wealth generation was handed out to attendees, which stated clearly over and over again that the only way to really build wealth — other than to win the lotto — is to build something that other people want, and do it better than everyone else.

The good news is that I accidentally figured that out on my own. The bad news is that building anything is a huge risk, and has much more potential to fail than succeed. While I dream of getting rich overnight (who doesn’t) I personally feel that if I do not “earn” my wealth I would never feel comfortable spending it, even on reasonable purchases for a frugalista in the upper class.

PersonalCapital.com, my Mint.com replacement, is geared towards people who are actually saving and investing wealth (versus Mint’s focus on debt.) They recently added a really cool feature where you can put in your stock options in a private company and track vesting schedules. They even have a “what if” feature where you can put in the amount of the stock in the future and dream about how much you may have down the line, should your company be a huge success. Granted, I’ve already done this in Google Spreadsheets, but actually seeing the graph makes it feel that much more real. The difference between $3 a share and $5 are share becomes huge once all of the stock is vested.

Even so, I carefully plot my expenses and networth ignoring my company stock, not counting the amount I paid up front to exercise. If the company happens to fail, I’ll consider only the amount I paid to exercise a loss. But I’m not going to get my hopes up about the future too much. It’s definitely thrilling to think that I may have a shot at some sort of wealth at some point in my 30s. My boyfriend and future husband has not saved a dime — so it’s on me to build the life I want for myself and my one-day family. Deep down, I know I will be hugely disappointed if this doesn’t work out, at least somewhat. I don’t need $20M, but I’ve always felt that if I could have $1M by 35 I’d feel comfortable to not have to worry all the time about money, despite still having to work FT with kids, and $5M by 35 I’d be set to live the life I want.

So I guess my goal is $5M. That leaves $1.5M for a house (which is not extravagant in the bay area); $2M to invest and let grow, and $1.5M for life, kids, vacations. It’s quite possible that I’d never live in a $1.5M house, and instead move somewhere more affordable, buy a nice house for $800k, invest more, etc. I’d certainly want to start generously donating to charity, and would make sure to include that in my overall spending plan. $5M is certainly the dream.

It’s no April Fools joke that I have a much better chance of achieving that then ever winning the lottery. After my last startup that had no growth momentum, I went to work for a giant corporation, and decided that I never wanted to work for large corporate America again. Building companies is my passion, and it doesn’t hurt that if you get in early you have a shot at wealth.

The other day I read an article by a big businessman in Europe who said the trouble with today’s generation is that everyone wants to be Mark Zuckerberg and get rich quick. I don’t think that’s a problem, the only problem it creates is that company’s build what they can get out at the minimum versus having the time and funding to create something truly revolutionary. But for individuals, these products and companies can be very successful. Failing fast is probably the best advice I ever received in my life. After all, life is pretty short, whether you live to be 50 or 100. Even if you make it to 100, and you figure you will be working about 50 years between 20 and 70, that’s just 10 jobs if you stay at a company for 10 years. But if you stay at most 2 years, and only stay at the ones that have a solid chance for success longer, you can at least have a greater chance of success, especially in early-stage companies. Just make sure your company has a business plan and measurable objectives. If your business says it doesn’t need to worry about how to make money yet, unless you 100% believe in the idea and can imagine how it would eventually have revenues, get out, or don’t get in at all. When your company has a clear, measurable business model, you can tell very quickly if it’s going to succeed or fail, not just by the numbers, but by how management handles changes if they fail to hit those numbers.

But, really, who knows… it’s a crapshoot. I’ll continue to gaze like a starry-eyed dreamer at my PersonalCapital.com chart, showing how my $5M dream just may one day be a reality. In the meantime, I’m well on track to hit my target goal of $200k networth this year, which is all cash and investments. On that path, I may never have $5M, but I’m confident by the time I retire I can gather a million or two, as long as the world avoids any sort of apocalyptic nuclear holocausts… at which point, even $5M wouldn’t help anyway.

Fantasy Millionaire: How Far From Reality is It?

One of the “benefits” that comes with working for a startup is stock options. I put benefits in quotation marks because stock options end up being worth nothing, or in the case of NSOs that you exercise early, end up costing you money. But along with the risk comes that little glimmer of hope that as the months go by, you’re quietly collecting what, in the future will be worth hundreds of thousands, if not millions of dollars.

At the same time, I’m still living in my $600 a month shared apartment, feeling depressed looking at basic homes in the area that cost $1M, and feeling like I’ll never come near to affording a home and stable life until my 50s or 60s. I’ve managed to save $170k thanks to the stock market returning and a weighted investment in Apple,  but that still is a long way away from the type of money you need to live a comfortable life in Silicon Valley. Meanwhile my boyfriend has saved absolutely nothing and will likely be enrolling in graduate school and taking on debt before we get married in a couple of years. Saving enough money to lead my dream life is all on me.

The possibilities of what stock options could be worth are exciting, but the reality of life is a bit of a mindfuck. It feels like all my chips are on red and the roulette is spinning for a half decade before I see where the ball lands. Luckily there aren’t too many great sacrifices because my life is pretty simple now. But in a few years when I want to have a family, that changes. I’m absolutely terrified of the future, and spend everyday wondering what if, or what if not.

At least there’s a tiny chance that my reality could be my dream reality — one where I reach financial independence before I have a family, where I can go back to school for art or film, and not worry about the financial implications of creative failure. I have so many dreams for this life, and with a little bit of luck, patience, tenacity, and hard work, maybe dreams can come true.

Buy a House vs. Invest in the Stock Market or..?

This a question that has been weighing heavily on my head lately, as some would say it’s the best time to buy a house/condo right now, while mortgage rates are low, and others would say it’s the best time to invest in the stock market as the recession, over or not, is still heavily weighting stocks down, and growth will return to the markets sooner or later.

There are a lot of reasons why it is not the right time to buy a house, for me personally. Putting money in the stock market is an investment, buying a house is a life step, not necessarily an investment. It’s certainly tough to aspire to be the next Warren Buffet when your entire liquidity is tied down in a 2br, $500k condo, with a monthly HOA fee to boot.

But I still have to ask myself — am I being stupid? Stocks can just as easily go down as they can go up, and I may just be investing away my downpayment — and all of my savings — by putting my money into the market. And by stupid, I mean by picking individual stocks (something super risky, even with large cap companies) vs focusing on my earlier index investing strategy.

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My $20,000 Bet: The Biggest Risk I’ll Ever Take

Given that my largest one-time purchase ever has been on my $7,000 car, it was difficult for me to write a check today for $15,000 to “early exercise” the majority of my mostly pre-vested stock options. Perhaps I should have sought out more advice before doing this, but I feel like my life has a way of working out and this was a smart risk to make.

Worst case scenerio — I find out that over the long run, this risk has cost me $15,000 plus whatever interest I would have made investing that money elsewhere. Best case, I could become a millionaire, or even a billionaire. Most likely outcome is somewhere closer to the first option, but why not take the risk now when I’m young and can handle the set back.

The whole equity situation at startups is so tricky. You really can only get the best value out of your options if you’re able to exercise early, at the strike price, before the stock value is raised in a later funding round. But early is also when it’s not very clear how the company will do over the long run. It’s exactly like buying a lottery ticket, except maybe you know that the winning lottery ticket was sold within one specific town. You have some insider information that within this “town” someone is going to win big. Everyone else, still, is going to lose. But if you were able to pinpoint the town, or even the exact street the store is on, would you buy a ticket?

That’s what I’ve done. I wrote out my check, stared at it for a few minutes before handing it off to my boss to exercise most of my stock options. I believe that of all the companies I may work for in my life and have in this past, this is the one to bet on. The team is great, the product, while early, is solid and something that companies are willing to buy and spend quite a bit of money on. I’ve been involved in many aspects of the business, enough to know the market and believe we have a shot at really building something special.

My last startup — where I never bought the stock — never had a business model. There, it seemed silly to buy the stock. And even they managed to get acquired for a small sum. No one besides the founders got rich off of it, but at least anyone who exercised their options got their money back plus a little pocket change.

Still, as I drive around in my busted car with no air conditioning, I can’t help but think… should I have taken that $15k and spent it on a nicer car vs. exercising my stock options that a few years from now could very well be worth nothing. I guess I’ll just have to wait and see. My dream is to have a million dollars by the time I’m 30, and given I’m half way to 28, this is really the only possible way.

Should I Exercise My Right to Stock Option Exercising

Working in startups, your pay is always split somehow between salary and “stock options.” If you don’t know what that means — basically an option gives you the option to purchase a share of stock at a low “strike price” of the company. If the company does well, the price of the stock goes up, and if it does really well the nitty gritty details that can make the purchasing of the said stock through the option become less painful to think about. Trouble is, most companies, even good companies, aren’t Facebook or even LinkedIn. So exercising options early could mean to big losses down the line.

There are some tax reasons to exercise options early. From my understanding, if you have ISOs (which I do), you can buy the stock options up front, before they’re vested, and wait a year to sell them at capital gains tax rates. That is, if in a year, or after a year, they’re worth more than they were when you bought them. And that only really makes sense if your company goes public — the odds of a startup going public are very, very small. More likely, even if your successful,  you get acquired. And as I experienced at my last startup — an acquisition, even when the founders do well, might not result in a great turnout for the rest of the employees.

So most of my instincts are telling me it would be silly to exercise the options now. Why not wait? Well, my company is likely raising additional funding soon, which means the value of the option will go up. While I’ll still be able to buy the option for the lower strike price, I’ll have to pay tax on the difference between the strike price and the value when I buy the option, which could be quite a lot, especially given that I’d be PAYING for the option and owe money on it. And there’s still a decent chance that eventually it will be worth $0.

Now, I could exercise a portion of my options – take a little risk, and wait on the rest – but it’s not clear this makes sense either. There is a whole issue with AMT that I don’t understand (anyone want to explain this to me?) that you can avoid if you exercise early, so says the Internets. I’m not sure at what point you hit the AMT issue in terms of your yearly gross income.

Besides all of that, the reality is that I don’t really have the $20k I’d need to purchase all of my stock options right now. Well, I do have it — I have $130k in random investment accounts — but I don’t know if it makes sense to pull my funds from any of them to exercise my options. It’s a huge risk. It might be better from a tax perspective if, in a year or a few years we get acquired, but who knows if that will happen. I do believe in this company (which is rare) so that says a lot. Still, I’m relatively risk-adverse when it comes to money. Hmm. What do you think I should do?

Startup Stock Options: Taxes and Risk

One of the supposed benefits of working at a startup is the equity you’re offered as part of your compensation package. Given that more often than not this equity is in place of a 401k and a portion of your salary, in theory it may offer great reward in the long run.

However, what I didn’t realize about stock options (ISOs and NSOs) years ago is that in order to actually receive the stock, you still have to pay for it. Options just mean that you are able to buy the stock at a strike price, which is “low” but may very well still be higher than what the stock ends up being worth. Continue reading