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Should I exercise my options to buy stock in a company not yet trading publicly?

Personal Finance & Money Asked by JMArmbruster on April 30, 2021

I used to work for a start up that offered stock options which I haven’t been able to afford to exercise until now. I’m very new to stocks so I’m not 100% sure how it works.

Currently, I’m able to buy 1673 options at $2.31/share (originally 1746 options were granted) and they expire in 8 months.

I use Carta to manage these options and according to the app, the fair market value for these shares right now is $4.46/share.

So it looks like to buy these shares would cost $3,864.63 plus tax. With tax would cost $5333.01.

Am I correct in assuming that if I hypothetically bought these options and then immediately sold them my profit would be $2128.57 (minus any capital gains taxes)? I’m basing that on a total sale of 1673 shares times $4.46/share minus $5333,01.

3 Answers

EDIT

I think the operative phrase in your post is that this involves stocks/options you "haven't been able to afford to exercise until now"

You're already acknowledging that affordability of a $5k stock investment is potentially an issue for you, even now, so I would advise proceeding with caution.

Since the company isn't publicly trading, there's no realistic way for you to sell the shares (you could sell them to someone privately if you could find them and arrange it), so it doesn't matter what their "fair market value" is. I think the valuation you received assumes an analysis of the company's financials and a public market for their stock, which right now doesn't exist.

Now, that being said...you can take the risk of buying the options and exercising them to own the stock if and only if a) you truly believe the company will (at some point in the future) become a publicly-traded company, and b) you're willing to lose everything you invest if you're wrong. If you're willing to be patient and wait for them to go public, you could be well-rewarded. If not, well...you might be able to wallpaper your house with the stock certificates! (not that anyone prints them anymore, but I remember the days...)

If the money you're going to use to buy the stock isn't money you can't afford to walk away from, I would advise you not to do it without some deep soul-searching about what happens if your choice is wrong.

IF MONEY IS AN ISSUE, AND YOU'RE SO CONCERNED ABOUT RISK, WHY NOT FIND SOMEONE WHO STILL WORKS THERE THAT WOULD BE WILLING TO BUY YOUR OPTIONS FROM YOU?

Check with the company to find out if this is an option, because it might be your best one, and even better, doesn't put your money at risk. You won't make the same kind of money you would if you could exercise them and then sell the stock, but this is "found money" to you anyway.

I'm sure I'll get blowback from some people who'll argue it isn't much money you're putting at risk, but the fact is, it's YOUR money, and only YOU know whether it is money you can afford to lose.

You really have to look at cost/benefit - if you have enough faith in the company and its future prospects to risk $5k+, then you simply have to decide whether you're going to take the leap. But if you do, understand the risks in full before you do it! If you know anyone in the company's accounting department and you can have a conversation with them about it, see if they can shed any light on how the company's doing about paying its bills and getting paid by its customers. Find someone you know in the sales department and see if they'll give you an clues about how the company is doing and what the future looks like. In most large organizations this wouldn't be very easy, but with a small company (and it sounds like this one might still be) you might have some luck.

Whatever you do, again let me emphasize - KNOW THE RISKS AND MAKE SURE YOU'RE READY TO FACE THEM before you do ANYTHING!

Correct answer by SRiverNet - reinstate monica on April 30, 2021

As others wrote, since the company isn't publicly traded, "immediately sell those shares" is easier said than done. But it doesn't mean that selling those shares is impossible. It just means that if you want to sell those shares, you have to find a buyer yourself and negotiate a price with them.

Is there someone in your company who is really enthusiastic about those stock options and regrets that they don't have more of them even though they would have the disposable income to exercise them? Then strike a deal with that person to let them use your stock options.

While employee stock options themselves are usually not transferable (although it can't hurt to ask - in a small company they might make an exception), the stocks bought with them are. So you can exercise your options and then the other employee immediately buys that stock from you for a price you agreed on before (somewhere between the option price and the fictitious market price).

This is a very risk-free way to turn your stock options into money - as long as you have a buyer. Certainly something you should try before you just let them expire. But if you can't find a buyer, then you might want to ask yourself if those shares are really worth even $2.31, and letting them expire might not be such a bad idea after all.

Answered by Philipp on April 30, 2021

  • The information (from "Carta"?) on the "value" of the shares is nonsensical

  • It would seem that the options expire in 8 months: if you do wish to exercise them, unless there's something we don't know about the contracts, there is no reason at all to exercise them, until, the last few days before they expire. That will give you more time to see how the company is shaping-up

  • Shares/options are utterly useless until a company is public.

(However some companies do have oddball schemes where you can indeed sell shares in some way, before going public (to help boost the fake idea that the shares are worth something before the company goes public). If that's the case you'd have to have full and complete details on that, the limits involved, prices, etc.)

Answered by Fattie on April 30, 2021

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