Ask HN: High cost to exercise startup options – what happens if they go to zero?
The problem is that exercising all these options will cost me hundreds of thousands of dollars.
That seems like a big, scary gamble. Effectively, I'll be investing six figures in a pre-IPO startup. I am not the type of wealthy individual who can afford to make this sort of investment. The road to liquidity is long and treacherous. What if all these shares, which I bought for a substantial chunk of my net worth, go to zero in the long period of uncertainty between exercise and liquidity?
Are startups aware they are putting potential employees in this dilemma? Are there any protections available to me as an individual who is not wealthy, would not normally take risk with such a large amount, and is just trying to get fair compensation for their work to offset the cash or highly liquid RSUs that more mature companies offer?
If the company is successful, the money you will make can be life changing. If the company fails, then you lose most if not all of your investment.
However, in the last few years, many solutions have appeared to address this binary situation. I work at the ESO Fund and we try to provide a middle ground. We provide money to exercise and any potential taxes in exchange for a piece of the upside and we do this on a completely non-recourse basis (meaning you don't have to pay us back if the company fails). Our deals are structured to give you the majority of the upside without having to invest your own personal money!
Feel free to reach out if you have any more questions!
> What if all these shares, which I bought for a substantial chunk of my net worth, go to zero in the long period of uncertainty between exercise and liquidity?
If you own shares, then you have a big loss. If you own (or are entitled to) stock options, then you have no gain or loss, you simply don't exercise them.
If I choose to do so, then I will have no risk of a loss, because like you said, if the option is underwater, then I will simply not exercise.
The only reason I may end up having to take risk is due to limits on exercise windows. For example, I have to exercise any vested option within 6 months of leaving the company. In that case, I may want to buy the stock, and hold onto it if I expect it to appreciate. Then I will be taking risk, effectively like buying any other stock that may depreciate.
Normally though, people hold their stock options and sell them when they are with something. People are granted stock options say 100 shares at $20, they wait until they vest and are worth something like $60 and do a "same day sale". In this case they would be lent $20 per share, sell them, pay back the $20 netting $40 per share.
Otherwise, of course, waiting until the options are profitable is the best move and is risk-free.