Here’s what your framework should include:
It’s also important to note that these decisions are not black or white. You don’t need to exercise it all, sell it all, or do nothing. Inaction is one of the most common things I see, and it’s usually one of the most costly. Not just from a financial perspective, but it often leads to people making less-than-ideal decisions because they’re forced to.
For example, someone not doing anything with their equity and then they’re recruited for a great role at another company. But, now they have a 90-day ticking clock to figure out what to do with the equity at their former company — which they still believe is great! — before it all expires.
Similarly, if you have the opportunity to sell in a tender offer, you could get some immediate cash for a house project, a new car, or even an international vacation with your family. These are all viable reasons to sell some shares, rather than not participating because you think the value is too low, or that an IPO may be around the corner.
I recently partnered with two Stripe employees who faced this exact decision.
Stripe’s impending tender offer — which they raised $7B to foster — is a good example of how to make a decision. An opportunity to sell some shares? Great! But Stripe also raised that capital at a much lower valuation: $50B, down from a high of $95B.
Could that valuation increase again? Of course! They’re one of the strongest late-stage startups out there. But, as my colleague John always says about investing: Don’t try to predict the future.
Here’s some more context on each of these individuals:
Based on the latest Fair Market Value (which is similar to the 409A), they both have ~$3 million worth of Stripe equity. Pretty nice situation to be in! 🙌
Both are optimistic on Stripe's prospects for the future, so they’re a bit disappointed with the current valuation, which is down nearly 50% from two years ago. Hence, both individuals are not eager to sell much of their Stripe stock in the upcoming tender offer.
But both of them were seeking advice on how to approach the decision, and if it could make sense to sell. If so, should they sell NSOs, ISOs, RSUs (now common shares since their RSUs vested)?
🙅♂️ Stripe employee 1’s plan:
For the first individual, we concluded that he is not going to participate and sell stock in this tender.
Stripe stock is by far his single largest asset, so we discussed the risks associated with any one security making up a significant (~50%) portion of his net worth and what opportunities that a financial windfall could provide for him today.
He understood both the risks of owning a concentrated stock and the opportunities he is sacrificing by not taking liquidity now during this event.
My role as the advisor is to educate him on the benefits and drawbacks of each scenario, identify blindspots he may not see, and ultimately help him to make an informed financial decision. He did just that.
So why did we conclude not to sell any stock?
🙋Stripe employee 2’s plan:
For the second individual, though she has a similar amount of Stripe stock, we concluded for her to sell 33% of her stock in this tender.
So why was my recommendation for her to sell a third of her stock, but not the same recommendation for the other individual who has a similar amount of Stripe stock?
Rule #1 of personal finance: It's personal.
Her personal situation is vastly different from his situation. Here's a brief overview:
With the proceeds from her tender offer sale, we developed a plan for her to:
This approach reduces her concentration risks, allows her to retain additional upside, creates greater flexibility from a financial and employment perspective, and aligns with the objectives she has for her family. All benefits that are moving her closer to becoming financially independent.
First of all, your pre-IPO liquidity options may be limited. Yes, I’ve worked with employees at late-stage companies like Stripe and SpaceX navigate tender offers, but not all companies offer these. More late-stage companies could begin to offer them, if they already don’t, due to expiring equity grants (the main reason Stripe is).
And yes, there are a number of secondary markets that are still active. But, you’re more likely to find buyers for late-stage companies closer to exit, not all companies allow it, the timeline for finding a buyer isn’t always clear, and some have minimum transaction amounts you may not want to meet.
Could this change, especially for earlier-stage companies? Sure! The last two years have shown the risk of companies waiting longer and longer to exit — you get expiring equity grants and an inability to access liquidity could impact employee morale.
But for those that are given liquidity options, they should approach them armed with as much information about how it affects their financial position as possible. And, even for those that aren’t up against these types of decisions, creating a plan now for your equity is always a good idea, so you don’t find yourself thrown into a situation where you suddenly need to make a decision, and have to start from scratch.
Remember, it’s not an all-or-nothing decision and the goal is really to create flexibility for yourself financially and in your career, while also reducing the risk associated with startup equity. Even if you make a plan, you may want to make adjustments along the way. Financial plans are never set in stone!
If you do want to get a better understanding of how your equity fits into your financial situation, or if you have the opportunity to sell, put time on my calendar and I’m more than happy to answer your questions.
Things we’re digging: