Exercising company stock options

[CC07 PEU]

I have the option to exercise some stock options I was given when I joined my existing company. I'm leaving the company and need to decide whether to exercise these options or not. I've never bought or sold shares in my life and it's fair to say I don't know much about the process at all.

The cost for me to exercise the options is just under £2k. The company in the last 12 months hasn't been profitable (operational costs exceeded incoming revenue) although they have funding in the bank to the tune of about $25M. They have now introduced a new CEO to cut costs with the aim of breaking even in 2016.

Do you think it's worth me buying the shares at just under £2k? I'm not sure if it's worth it and whether I want to be spending that sort of money at the moment.

[The original Nick the Greek]

CC07 PEU said:

I have the option to exercise some stock options I was given when I joined my existing company. I'm leaving the company and need to decide whether to exercise these options or not. I've never bought or sold shares in my life and it's fair to say I don't know much about the process at all.

The cost for me to exercise the options is just under £2k. The company in the last 12 months hasn't been profitable (operational costs exceeded incoming revenue) although they have funding in the bank to the tune of about $25M. They have now introduced a new CEO to cut costs with the aim of breaking even in 2016.

Do you think it's worth me buying the shares at just under £2k? I'm not sure if it's worth it and whether I want to be spending that sort of money at the moment.

The answer is simple.

If the cost to exercise the option is two grand, how much could you readily sell them for the next day?

If the answer is, say £1500, then you wouldn't want to take the option.
On the other hand, if the answer was say, £2500, you may wish to exercise it.

[CC07 PEU]

The original Nick the Greek said:

The answer is simple.

If the cost to exercise the option is two grand, how much could you readily sell them for the next day?

If the answer is, say £1500, then you wouldn't want to take the option.
On the other hand, if the answer was say, £2500, you may wish to exercise it.

I don't think I'd be able to sell them for anything the next day as it's still a private company. My understanding of this is that you'd exercise the options, then hopefully be able to sell them at a profit if/when the company becomes public and is performing well. Does that sound about right?

[foliedouce]

CC07 PEU said:

The original Nick the Greek said:

The answer is simple.

If the cost to exercise the option is two grand, how much could you readily sell them for the next day?

If the answer is, say £1500, then you wouldn't want to take the option.
On the other hand, if the answer was say, £2500, you may wish to exercise it.

I don't think I'd be able to sell them for anything the next day as it's still a private company. My understanding of this is that you'd exercise the options, then hopefully be able to sell them at a profit if/when the company becomes public and is performing well. Does that sound about right?

I'd check the small print in your option agreement, typically you can't exercise the option until the company is listed / sold, and if you leave in the meantime you lose the right to the options.

[The original Nick the Greek]

CC07 PEU said:

I don't think I'd be able to sell them for anything the next day as it's still a private company. My understanding of this is that you'd exercise the options, then hopefully be able to sell them at a profit if/when the company becomes public and is performing well. Does that sound about right?

Yes.

In that case it's a "punt".

If you think the value will rise, I guess the question is can you afford to loose two grand if it all goes tits up.

[doogle83]

foliedouce said:

I'd check the small print in your option agreement, typically you can't exercise the option until the company is listed / sold, and if you leave in the meantime you lose the right to the options.

I purchased a couple of sets of options in my current company before they were listed. They had a 2 or 3 year period I had to hold them as options for before I could buy as full shares.

[walm]

If they have funding (the $25m) then you should be able to find out at what implied valuation at which those funds were raised.

(For example, if the investors bought 25% of the company with that $25m then the implied valuation is $100m.)

Then you need to find out how much your £2k investment will buy you through your options.

You will probably find a number like say 2,000 shares.
So then you need to find out the total number of (fully diluted) shares outstanding, which could be say 100m.

At that point you can see that the implied valuation at the top says each share should be worth c.$1 but that you are having to pay $1.47 for each share (£1).
That makes it a very bad deal, unless something great has happened to the company since the last round of fund raising.

Valuing a breakeven company is very hard and no one should be better placed than the person who invested that $25m - so it is worth using that as a relatively solid benchmark.
However, if things have gone badly wrong since that investment (say the burn rate is higher than expected) then you would need to haircut it back.

[CC07 PEU]

Ok, I think I'll give purchasing the options a miss. There are probably better ways of investing £2k if I really wanted to do that.