Stock options question

[towernick]

Hey guys, my fiancee got laid off from her company last month and has 17,000 shares she can exercise at between 5 cents and 14 cents a share. The company is a smaller medical device company, and it would cost about $2,100 to buy out all her shares. We're not sure what to do here. What do the wise TRF minds think? Buy half the shares, starting with the cheapest? Buy all and hope the company is bought out, etc.? Keep the $2,100 and put in into another investment? Thanks in advance for any advice.

[cdmorenot]

This is a tough one - $2100 isn't going to yield much anywhere else unless you're very involved, dumping it on the market and leaving it on auto pilot isn't going to do much. Was her lay off an isolated case or is the company on a downward spiral?

If it is on a downward and they have patented technology, a large client list and a suite of products there is a chance the company could get bought out. If this is the case there will be a period where the stock options will rise in price and that is your opportunity to make a quick dollar.

Look at the health of the organization, the value it may bring to outside investors and most importantly, can you afford to lose $2100 ?

It is a chance that I would be willing to take considering I've lost much more on a single bad watch purchase.

[tylerad1]

Huh...last I checked laying off employees was never a good sign

[Star Ferry]

What is the company's current share price? If it's higher than the exercise price, and there is a sufficient depth of buyers at the market price, then there's money to be made by exercising and then immediately selling.

If the company is private, then she needs to take a guess at whether or not her options have any value

[sea-dweller]

Agree here. If the current market value of the shares are higher than the option "strike" price, there's immediate profit to be made. I would buy the options and sell them immediately at market share price.

Originally Posted by Star Ferry

What is the company's current share price? If it's higher than the exercise price, and there is a sufficient depth of buyers at the market price, then there's money to be made by exercising and then immediately selling.

If the company is private, then she needs to take a guess at whether or not her options have any value

[rr-nyc]

Originally Posted by sea-dweller

Agree here. If the current market value of the shares are higher than the option "strike" price, there's immediate profit to be made. I would buy the options and sell them immediately at market share price.

+1

There would be no point if you'd start at a negative position.


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[Lordofrolex]

Originally Posted by sea-dweller

agree here. If the current market value of the shares are higher than the option "strike" price, there's immediate profit to be made. I would buy the options and sell them immediately at market share price.

x2

[Tri-Tip]

If they exercise the options and buy the shares, isn't there a tax liability for the difference between the share price on the date purchased and the price paid?

Of course, this would bring the tax basis up to the share value on the date purchased, so less taxes will be paid later when they are eventually sold.

[towernick]

A point of clarification, the company is currently private. $2,100 isn't a problem for us, but it's still $2,100 and could be put into other individual stocks, wedding fund, etc. Two other employees were laid off, there are about 150 total employees.

Generally speaking, the company has been a "start up" for 13 years now, with a device used by physicians, hospitals, and academic centers. About two years ago, there was rumored to be one year left of funding, however, since then there was a $34MM round of funding that included some money coming from GE.

I'm leaning towards exercising 7,900 of the cheapest options for about $570 and treating it like a gamble.

[Halothane]

The general trend in healthcare is mergers and acquisitions as only the larger companies can be competitive in this new healthcare era of medical device taxes, rising insurance premiums, and price pressure on big pharma when Hillary gets elected, etc. That said, if the company has some products currently in use and in the pipeline they may be viable long-term. If so, there is a chance they could get bought out. For such a small amount ($2100) I would exercise the option and just put it away and not think about it. Of course, the downside risk is the company goes belly up and you lose the $2100. Ultimately, only you can decide if it's a risk you want to take.

[rr-nyc]

Originally Posted by Tri-Tip

If they exercise the options and buy the shares, isn't there a tax liability for the difference between the share price on the date purchased and the price paid?



Of course, this would bring the tax basis up to the share value on the date purchased, so less taxes will be paid later when they are eventually sold.

When they sell


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[rr-nyc]

Originally Posted by towernick

A point of clarification, the company is currently private. $2,100 isn't a problem for us, but it's still $2,100 and could be put into other individual stocks, wedding fund, etc. Two other employees were laid off, there are about 150 total employees.

Generally speaking, the company has been a "start up" for 13 years now, with a device used by physicians, hospitals, and academic centers. About two years ago, there was rumored to be one year left of funding, however, since then there was a $34MM round of funding that included some money coming from GE.

I'm leaning towards exercising 7,900 of the cheapest options for about $570 and treating it like a gamble.

I'm in the medtech space and would say that 1) a 13 year-old start-up is not a start-up and 2) if GE was part of that recent funding, that's a good sign. Without knowing to many specifics, I would make the $2100 investment because there isn't much out there where $2100 could mean something.

Were layoffs to eliminate positions and save money or are they using that to fund hiring people in other areas? That might be more insightful


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[hsfrank]

I would suggest the following before you buy any shares under a stock option:

1. Having worked there what is your opinion of the company's future. Having employees laid off is not a good sign under any circumstances. Usually it starts with a few employees and escalates into many.

2. Since you stayed at the company is is private, there will be a limited market for your shares especially since other employees have stock options. It will only be valuable when and if the company is taken public. That could be a long time or never.

3. When you sell the shares there will be a tax liability. If you sell them immediately you will be taxed at ordinary income. If you hold the shares that you purchased for ovary year you'll then be taxed at capital gains rate.

4. More Important. is The use of your money now. Couldn't be better put to use Towards your wedding fund or other uses? Especially if your fiancé does not have another job.

5. Lastly what is the expiration date of the stock options. If they do not have to be exercised immediately, it might be wise to hold on to them and watch the company to see if it is a worthwhile investment. Not all stock options are worthwhile.

Good luck

[azguy]

Originally Posted by rr-nyc

I'm in the medtech space and would say that 1) a 13 year-old start-up is not a start-up and 2) if GE was part of that recent funding, that's a good sign. Without knowing to many specifics, I would make the $2100 investment because there isn't much out there where $2100 could mean something.

In general, I agree with this. If the $2,100 could be lost without losing a wink of sleep, buy the options. In cases like these they are usually issues much lower than any theoretical/implied value of the stock, so it COULD be a god deal.

[sea-dweller]

I can tell you this, it's a high risk/reward situation. The company is currently not being traded on an exchange actively (may or may not ever be traded), but the positive side is that after 13 years, someone is still funding the company, and sees the value in the products.

A possible outcome is that it could get sold at some point. I worked at a Silicon Valley start-up in a similar situation. We were sold after about 5 years and the stock options vested. But, it was a gut wrenching 5 years, weeks with 5 months left of funding, etc

[WhatTheDeuce]

Would you happen to know the number of shares outstanding? Suppose there are 1MM shares outstanding and the 34MM in seed money was the only value, then they would be theoretically valued at $34/share. You would be risking $2,100 for a potential return of $578,000 - $2,100. If there are 10MM shares outstanding, it would still be worth $57,800. Again, theoretically. Is there a potential buyout opportunity (is it a unique business)? What if the company is valued at more than just the seed money? You could be missing out on huge upside potential. But you could also lose $2,100. Can you afford to lose $2,100?

Personally, I'd risk it, but you'd need more information. I think it's a no-brainer.

Good luck with your decision.


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[Etschell]

don't do it. it isn't liquid. who is going to buy it?

[Star Ferry]

Originally Posted by Etschell

don't do it. it isn't liquid. who is going to buy it?

By this logic no one at a private company who is awarded a call option should exercise it. Imagine if early employees at Microsoft, Google and FB had followed this advice.

Also it is possible (but unlikely, I'll admit) that the stock is decently liquid

[Etschell]

Originally Posted by Star Ferry

By this logic no one at a private company who is awarded a call option should exercise it. Imagine if early employees at Microsoft, Google and FB had followed this advice.

Also it is possible (but unlikely, I'll admit) that the stock is decently liquid

Whatever you say homeslice. This isn't Facebook or google.

[towernick]

We're definetly not talking about the next FB or Google, but if the company was bought down the road at $10/share, we'd be happy.

[asleep]

Originally Posted by rr-nyc

I'm in the medtech space and would say that 1) a 13 year-old start-up is not a start-up and 2) if GE was part of that recent funding, that's a good sign. Without knowing to many specifics, I would make the $2100 investment because there isn't much out there where $2100 could mean something.

Were layoffs to eliminate positions and save money or are they using that to fund hiring people in other areas? That might be more insightful

This... unless the $2100 is something you think about laying around the house.

The fact that you started this thread may put in in the latter category. But only you can answer that. Best of luck to you and your fiancée.

[Ed Rooney]

Originally Posted by towernick

We're definetly not talking about the next FB or Google, but if the company was bought down the road at $10/share, we'd be happy.

Is $10/share realistic? What would most night school MBA's say it was worth?

[Star Ferry]

Originally Posted by Etschell

Whatever you say homeslice. This isn't Facebook or google.

Your advice still isn't helpful. Call options on private company stock can potentially be tremendously valuable, and private company stock often does have willing buyers.

Without knowing the market value of the shares, "don't do it. it isn't liquid" is not a justifiable comment. At a high enough share price(less strike), eventually even the most conservative investor would be willing to stomach the illiquidity (i.e. exercise the call).

I also never said it was FB or google. The purpose of those examples is to show instances in which "Don't do it. It isn't liquid" would have backfired in the extreme on early employees.

The glib "Whatever you say homeslice" is not appreciated.

[tbonesteak]

Actually an area of expertise for me. I'm currently at my 3rd company that was a startup. I've been here for about 5 years, we're public, the previous two, not so much lol.

The previous two I bought the options when leaving each time. The 2nd really has no chance, but the risk/reward if you are an early enough employee is almost always worth it (unless the company is shutting the doors, no reason not to roll the dice).

The first company I had about 10k shares on average price at 34 cents a share. The company announced it was going IPO in 2014 for around $12 a share (I've been holding this garbage for 7 years), unfortunately this fell through and the they pulled back (this was obviously pretty upsetting bc at this point I was thinking huge win). I'm still hoping they eventually make it public, although they really are a POS company, I still think it is possible. I risked about $3400 and if they even get out there at $8 a share, that'll be a quick $75k hit. The issue is, most companies have lockout periods, so if they really suck and come out at $8-$10, they could be $3 or $5 by the time you can sell (typically 6 months post IPO), although still a massive and worthwhile profit.

My second company I bought 3000 shares at $1.25 a share (this kinda feels like a waste and possibly an outlier where it would be best to just pass).

3rd company I got here 2 years pre-IPO, we were then bought by a larger company 2 years later. I came in around employee 250, company currently has almost 2500 people.

I can't speak as much on medical device companies, but in the tech or media world, typically your options are cheap and will vest 1/4 after year one and then 1/36 every month thereafter, until fully vested by the end of year 4. They also throw some RSU's around, although unless you're a C- Level, not nearly as lucrative as being an early employee. It is almost time for me to start looking for the next venture.

In your situation, I'd prob say buy, although 13 years is a long time so I'd consider it more of a lotto ticket (remaining skeptical) with a moderate risk/massive reward. Unfortunately, I don't know as much about medical device companies and their IPOs, so I can't offer much more. If you do buy, look at it as a small loss, forget about it, and hope one day a nice payout comes your way, but don't even consider it anything until then.

Good luck!

[Etschell]

Originally Posted by Star Ferry

Your advice still isn't helpful. Call options on private company stock can potentially be tremendously valuable, and private company stock often does have willing buyers.

i will apologize for the homeslice comment. i stick by my suggestion. he's a big boy who can do what he wants. medical device company that is laying off employees doesnt sound lucrative to me.

[rr-nyc]

Originally Posted by Etschell

i will apologize for the homeslice comment. i stick by my suggestion. he's a big boy who can do what he wants. medical device company that is laying off employees doesnt sound lucrative to me.

I think you need a lot more information before drawing that conclusion. It isn't uncommon for a company to lay off hundreds, if not thousands of people in manufacturing in order to outsource production in another country and increase the operating margin by 20-40% overnight


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[sea-dweller]

Almost every company does a periodic "layoff" these days. It's a way to rid the company of people that are not "pulling their weight" or are despised by management.

If it is really a company wide layoff, and not just a periodic purging of staff not meeting expectations, then the company is likely in trouble.

[Star Ferry]

Originally Posted by Etschell

i will apologize for the homeslice comment. i stick by my suggestion. he's a big boy who can do what he wants. medical device company that is laying off employees doesnt sound lucrative to me.

No worries. You might be right that it's not a lucrative company, but OP wouldn't be entering at the market price.

Say it's $1/share if the company were sold now. Even if the company's value declines 10% and it takes a year to find a buyer, his most expensive option would return 540%. The company could tank and lose 75% of value, and the worst option would return almost 80%

Or if it takes 10 years for the company to be bought, assuming 90 cents per share, his most expensive option will have returned 20% per year.

Or the company could sell years down the road for 12 cents a share. Some options would not be worth exercising at all, and the rest would realize low single digit annualized returns

I am a trader (formerly financial, now physical), and there are asset classes I am not comfortable with either. But hand me a free call with a good enough strike (let's say 40% of market value) and I'd be a buyer of anything - office buildings, old maps, high end art, you name it.