> If you leave the company, your options will expire if you don’t exercise them. Let me repeat that: if you leave the company, your options will expire if you don’t exercise them. The exact timeline of how quickly they expire depends on option type and company policy, but the termination window is commonly as short as 90 days. So, exercising your options enables you to actually own what you helped build.
This is why I choose to not work for companies that do not have extended exercise windows -- and IMO neither should you.
I only had options at one firm which was Series D and had ~300 employees. The company issued them at a price which was rich, then steadily issued new options at lower price points. The management made it a practice to have periodic calls which would talk about how they were 12-18 months away from IPO and the price target was going to be ~5x the rich price. Then there would be talks where engineering management would pitch fantasies about how stock pricing worked for IPOs.
Meanwhile growth had stalled, and competition was getting stronger. I left all my options un-purchased. 6 years later when they had a Private Equity buyout I probably would have made somewhere between a -50% and 2x return (depending on liquidation preferences, subsequent issuance, and debt). At best.. I would have had an non-liquid 12% rate of return, losing out to the S&P500 over the last 6 years.
Yeah, it’s tough to say. Company wasn’t distressed, but it “only” 2x’d over 8+ years. Pretty much a classic flat/no growth situation with modest profitability.
It wouldn't have to be a PE buyout for equity to be zeroed out. Any buyout could lead to this, even in a non-distressed company (as pointed out by another poster).
Source: Me w/options in two startups that were acquired by public companies.
Yes but remember to think in terms of expected value. Which is kind of the “average” value of all the different return values you might get.
12% is the high end, but what are the probabilities of smaller results? 12% might be the outlier and the expected value might be hovering around zero or less.
Yes, however in a less aggressive tech market the return would have probably been 0. This was also the best case, the P/E buyout and subsequent funding injections may have diluted the value of those shares.
My point was to the people aiming for 100x or better gains. I didn't speak to the downside, you're correct of course: no specific vesting tends to the aggregate, and many are a long way adrift.
All other things being held equal, a company choosing a longer exercise window says that they are employee-friendly in at least one respect.
I know the conventional wisdom here is that options never matter, but the reality is that they sometimes do, especially for companies that are experiencing solid growth. I recently made several hundred thousand dollars off my options from a liquidity event, and I hadn't been at the company for a few years.
It's a great perk, even if it doesn't end up amounting to anything.
Agreed. You would be surprised how much companies are worth on the market. Private liquidity events can cause whacky things outside the original conventional stock contracts. EG. "The acquiring company can also accelerate the vesting of options or awards, choosing to pay cash or shares, in exchange for the cancellation of outstanding grants". That can be serious cash for someone somewhat new to the company - eg 1 year in.
This is a bad take. If you truly value options at $0 then you’re often getting a garbage deal wherever you go. If you’re only negotiating over salary - you’re screwing yourself.
Options is how you actually make money at startups. The salary is only enough to make sure you can afford to exercise your options regularly and not starve to death in an extremely HCOL area.
If you value options at $0 - just join FAANG and never join a startup.
The vast, vast majority of startup options are worth less than toilet paper. To say nothing of the shenanigans like dilution and liquidation preferences that will screw you.
They are lottery tickets at best. Yes, sure, someone sometimes wins big, but the odds are not in your favor.
If you think they're lottery tickets - pick a better startup. Seriously. You shouldn't be joining startups unless you think they have a chance of liquidation for you.
If you really do think they're worthless THEN JOIN FAANG.
The average time to exit is something like 8-10 years right now. Are you suggesting you can pick the startups founded over the last year or two that are going to have a big IPO in 2030?
Even if you magically knew which startups could be viable 8 years down the road, there's tons of factors completely outside your control that could tank a startup in an instant; e.g. covid, a world war, regulation, etc.
That "carpool as a service" startup might have had a great business strategy up until a pandemic showed up. And if you're spending 8-10 years waiting for a payoff, you only get ~3 shots to pick correctly.
There is no reason to work anywhere for more than 4 years. Vest the options, which have a 7-10 year exercise window because you’d only take a job at a company that had them, then quit and get another job and take another shot.
Your lottery ticket remains whether you are working there or not. The only reason not to leave after 4 years is if you are a founder or the company is giving you extremely generous compensation.
I’m one of the few people that does, but for me it’s because I actively played the startup game early in my career to maximize my lottery ticket chances.
The worst thing you can do is spend too long at a loser company when you are early in your career. And it often is hard to tell when you don’t have a lot of experience. That’s why rules like “don’t spend more than 4 years at a company” and “don’t put all your eggs in one basket” are good general roles even if you like the company/job. Because you might like the other job just as much and make 10x the compensation if the lottery ticket hits. I have many friends that hopped from jobs they liked to Airbnb circa 2017-2019 and… they are all very happy they decided to get another lottery ticket.
When you are later in your career it’s much easier to pick jobs and companies you want to work for because you know what you want and you now what questions to ask before you join.
If the company is growing and in the “lottery ticket zone,” there is no chance a refresher grant should be a meaningful change to your potential outcome (for example: 20% more equity over 2 years is not worth the opportunity cost of getting 2 years of equity at another company).
If the company is growing so slowly that you could get a meaningful refresher grant, then you should move to another company that is growing faster.
I wish I had your unimpeachable knowledge and foresight of which small fraction of startups will not only succeed, but succeed so much that your options will actually be worth something meaningful.
I would wish you the best of luck, but sounds like you don't need it.
“Success” means that the VCs get their money back and maybe make a decent profit and even the founders might make some money. It says nothing about you as an employee making money.
I wouldn’t want to spend years of my life on a 1 out of 10 chance.
This is an even worse take. The only way startups are a good way to make money is by working at a VC. And that's only because they can buy into 10s or 100s of startups at once and only need one to succeed.
> If you value options at $0 - just join FAANG and never join a startup.
This assumes that people only care about money and not about job satisfaction, mission, team, more scope/control over the company's future, etc. There are many good reasons to join a startup. Making money isn't one of them.
> you dont get rich at a startup by working for one, only by being a founder or an investor
I’ve written small (<$50k) Series A cheques into companies where employee no. 20 made more than I did. That’s fine. They invested a hell of a lot more and put much more on the line. Options shouldn’t be counted on. They’re high risk. But no need to be that cynical. Plenty of people want the ones they were in the trenches with to win big when they do.
I bet that employee didn’t have 50k in cash to invest in extremely high risk equity. Even people making 200k/year wouldn’t consider 50k a small amount (it’s almost half of your net). A higher-than-average salary is quite different from “getting rich”.
I mostly agree with you, but I would just add 'on average' to your comment. There are exceptions, but the most surefire way to reach financial security is to get a job in big tech.
I didn't read it that way. Startups live on the backs of people who either can't or don't want to work in big tech. The US in particular glorifies entrepreneurs and scrappy startups, but it's super hard and most fail.
If I thought I could pass the tech screening, and then deal with big company bureaucracy I would tomorrow. Instead, I'm a tech generalist who also doesn't mind handling business or selling, and I have a low BS tolerance. I've done ok in small companies over the second half my career, but I certainly made less than big tech.
I would say until the last three months, it seems like with a few years of experience and “grinding leetcode” anyone could get into one of the BigTech public companies.
I got in by doing a slight pivot from software engineering. But I definitely tell a couple of younger relatives who just graduated to do the monkey dance.
What is diff about last few months? I’m going to be doing the monkey dance too. I don’t get satisfied from doing more enjoyable coding work compared to salary increases. Even if I don’t get to big tech until after a recession possibly hits.
Companies are slowing down hiring and the startups and recently public companies are laying off people and freezing hiring.
I’m older (48) and fell into BigTech via the cloud consulting division - cloud application development. I never had to go through the leetcode grind. But my path was very narrow and I recommend that people go through the leetcode grind.
Ah yeah I was not sure if that’s what you meant. I’m older relative to college grads or graduate students.
I’m switching to programming as a full time career now after coding on my own for a long time.
I’m now trying to pivot to getting any meh job and then grind through leetcode in spare time. Vs do the grinding and possibly find myself unable to get a decent job.
Of course I’m not necessarily going for big tech for either first career job. Just as close as possible with the leetcode and hope to be in there after the 1st.
—
Will you have to do the leetcode grind if you switch job and want to “level up” as it were to an even better job and company?
I only know about small non tech enterprise companies where I never had a serious coding interview and was able to lean on my experience and my most recent job at BigTech where I didn’t go through any coding interviews, was able to lean on my experience and did have a couple of System Design rounds where I had to explain real world implementations.
From what I understand, for more senior level software development positions, they still put you through coding, system design and behavioral.
> If you value options at $0 - just join FAANG and never join a startup.
Basically, yes.
Most (large majority) of startups can't pay market rate salaries. So if you value options literally at $0, then a startup is only an underpaid overworked job, so skip it.
So to even consider a startup job, you need to mentally give some expected value (probability * value) to those options. The probability is going to be very low, so the potential value needs to be high, i.e. don't join without a significant option grant.
I've done startup, FAANG, and everywhere in between. Each offers advantages and disadvantages, but I learned far, far, far, far more about building software in my many years at startups. I've done everything from standing up infra, configuring routing tables, doing tech support, helping with sales, writing code, being a product manager, being a people manager, being an executive with a 40+ person distributed org, going through an acquisition, living through dotcom boom and bust, 2008 crisis, etc.
FAANG pay was ridiculous, and there are also great things to learn there as well, but I value my startup time much more in terms of my own growth.
I think there are plenty of valid reasons to want to work for a startup (rather than a FAANG) that have nothing to do with compensation. Not for everyone, of course, but that's fine too.
Tax benefits are still limited to 90 days. Personally I feel if the stock is really important to you, start saving into an "exercise fund" for yourself so that you're able to exercise when leaving rather than waiting for your next gig to start.
If you get ISOs (not NQSOs) and you early-exercise them such that the spread is $0 (or at least negligible/low) and you correctly file an 83b and the IPO or exit is more than two years from date-of-grant and one year from date-of-exercise, then you can get the more favorable long term capital gains tax treatment on the generated income from the exit event.
That’s a lot of conditions, so IMO they don’t make all that much sense and I much prefer RSUs (maybe I’d think differently as a founder). Plus there are sharp edges like AMT. I’ve been an early employee multiple times at companies that had successful exits and never successfully had all conditions satisfied, and have ended up paying regular income tax rates but had more complicated taxes to file.
If joining a company as a non-founder I’d just take straight RSUs.
Generally, stock options are granted before the company is liquid (aka pre-IPO) and you pay $X with the hope that they're worth more and liquid someday. As you hit vesting dates, you can purchase more of them up to your total grant. (There's also stuff around early exercise, don't worry about that.)
RSUs are just shares you don't own yet. When you hit your vesting dates, you don't have to DO anything, they just become yours. You don't have to pay anything to execute and often the company will sell some for you to pay the taxes on them.
I wouldn't say one is definitively better.. there are tradeoffs:
RSUs can be better because you don't have to spend money to get them and they're liquid immediately (or at least soon).
Stock options can be better because your pre-IPO price may be better than the public price but you have no guarantee they'll ever be liquid.
- RSUs are taxable at vest, and if the shares aren't liquid, offloading enough of them to pay taxes is a huge headache (sometimes the company will help buy some back, but it's also a headache for a startup to do this, so they often don't)
- Stock options are "cheaper" for a startup to give out than RSUs, so you get more shares, ie your equity is higher-leverage. So if things go well, you end up with much much more money than had you gotten RSUs (and yes obviously if things go terribly, you get nothing).
> Stock options are "cheaper" for a startup to give out than RSUs, so you get more shares, ie your equity is higher-leverage. So if things go well, you end up with much much more money than had you gotten RSUs (and yes obviously if things go terribly, you get nothing).
Is this generally true? I’m not sure it applies for the typical engineer joining a larger company (a Databricks or Stripe, say) where you’re not really affecting the cap table all that much. Do companies really give out more options than RSUs?
My one personal piece of anecdata here is when considering an offer from a startup (that I didn’t take), they offered during negotiations to change the mix of RSU+options into just all RSUs (same total number).
RSUs are better but you can't get them before a company goes public. RSUs will have non-zero value. Options might never be exercisable but they're the normal way you get a stake of ownership at a startup (you don't get stock). So if you want to own part of a company before it goes public and you're not an investor, options are usually the only way on offer.
You can certainly get RSUs in a company before it goes public. You won't (generally) be able to sell them very easily, but being a publicly traded is not a requirement for issuing stock to employees.
One step further: Options are just a way for companies to get out of paying you a salary. (I got them from Microsoft, and from Intel before they were offered to all employees.)
Options = salary
In other words: exercise them as SOON as they vest. I had two financial planners tell me that over 15 years (I fired the first one), and both were 100% correct in hindsight.
But how do you determine if (not when) you should exercise? I am trying to make this decision for a company I recently left. I don't know when they'll IPO. I know they wanted to, but the market is getting slammed, and they just announced layoffs. I don't have much confidence in the company, so I am having a hard time understanding the risk. I don't really even understand what happens if they don't ever IPO and I have purchased options.
You are in a space I don't understand. (I don't even understand how/where you purchase options if it is not publicly traded and you are not an investor!)
Sorry, that's a PhD-level question, I'm still at options 101. :(
The company itself issues you the options, usually as a form of compensation because you're an employee, etc.
That option is a certificate that gives you the ability to purchase a share of the company at a specific price (the strike price). Usually when people say "buy their options" or "exercise their options", they are referring to buying the _stock_ that their options gave them the ability to purchase.
So if I join a startup, they grant me 100 options with a strike price of $0.50, and I decide to exercise them, I would write the company a check for $50 and get 100 shares of the company in exchange.
It comes down to whether or not you think the company will have a successful liquidity event.
If you think the company is going to shutdown, or sell at a lower valuation than your option's strike price, don't exercise them. Your shares will be worthless.
If you think they'll succeed and IPO or get acquired at a higher price, buy them (factoring in any potential tax implications, like AMT). It is a risk.
"Fire" is the wrong word, "stop seeing" is more accurate. Because he kept pitching his friend who sold annuities, who was one of those awkward guys that starts his pitch with 15 minutes of "this is how to invest, and 90% of americans don't .... now buy my life insurance annuities." Really didn't like that.
What if you could evaluate a company in a way that you maximize your chances. So look at things like options expiration, founders. Kind of what VCs do. Maybe that's why you should assess the startup you want to work for.
Yes, extended exercise window is preferable, but that also means the ISOs have to be converted into NSOs, which are less tax favorable assuming an exit happens. So while flexibility is nice, it's not a free gift either.
What you can control though are:
1. Knowing your exercise cost in advance - sometimes you can negotiate for a bonus that can subsidize the cost
2. Getting a fair salary and equity cut based on the funding stage; even if you don't exercise all your equity, your package can at least be used in future negotiations: https://topstartups.io/startup-salary-equity-database/
3. Asking for the option to extend exercise windows if you choose, turning ISOs into NSOs
I'm planning on exercising some of mine (in the post-resignation 90 day period) via EquityBee. I don't want to lower my own cash reserves now due to a looming recession, but do believe the company has upside. EquityBee (and a few other companies, like vested, all of whom I think are legitimate) gives me money to exercise the options in exchange for ~30% of the shares should the company go public, plus repayment of the original loan. It's a win-win for me. The worst outcome is I make no money; the best is that I keep 70% of my shares without paying for them. They even pay AMT.
> worst outcome is I make no money; the best is that I keep 70% of my shares without paying for them. They even pay AMT
I don’t have the details to be able to say anything useful. But there might be a narrow window of tax circumstances in which 70% of the equity without AMT but with loan costs is better than 100% with AMT + marginal long-term taxes and no loan costs. (Such schemes make sense if you’re concerned about not being able to exercise your options on short notice after getting laid off. If you have the liquidity, however, set it aside, take the yield and hold form after talking to a CPA.)
In this case you would likely owe income tax on the amount EquityBee lent you to exercise the options. Non-recourse loans that are forgiven are considered income by the IRS.
Yes, but you get the benefit of .7x exercising with the cost of never exercising.
Exercise, no successful IPO: lose $x exercise cost
Exercise, successful IPO: lose $x exercise cost, gain $y share sale benefit
No exercise, no successful IPO: gain/lose nothing
No exercise, successful IPO: gain/lose nothing
Service exercise, no successful IPO: lose nothing, maybe gain some AMT credits or capital loss carryovers
Service exercise, successful IPO: lose $x exercise cost plus interest, gain 0.7*$y share sale benefit
Your best best case is exercising yourself and getting the IPO, but you have to weigh that against the likelihood of it occurring and your personal risk tolerance for the $x cost to exercise.
I would never buy a lottery ticket, but I will always accept even .01% of a free lottery ticket.
> The worst outcome is I make no money; the best is that I keep 70% of my shares without paying for them. They even pay AMT.
I'm not 100% sure about this, but IIRC these programs are typically structured as a tax-free loan to you. If the shares end up worthless, the loan is then forgiven.
So while you may not be out the principle of the loan, or the AMT, the forgiven loan may be taxed as income at some point in the future.
Is amt really an issue if you’re high income swe? (especially if double high income). Seems like since trump’s “tax cuts” your normal rate will always be higher than (base + options * strike price)*.28 unless you really get a ton of options and there’s huge fmv growth.
It’s not options * strike price, it’s options * (fair market value - strike price), which is usually 0 at issue and is $$$ if you exercise and sell after an IPO (or after subsequent funding rounds/revenue growth which bumps up FMV).
EquityBee looks really interesting, but your startup has to have raised over $50M to participate. Does anyone recommend any alternatives for companies in the range of $25M-$50M raised and ~$200M valuation?
Yes. They covered mine at 100% of the max AMT. So basically that's option count * (FMV - strike) * 0.28, which is the max I can pay. I pocket the difference, but of course I have to pay it back should the company have a liquidation event
I gave my Wife money to exercise her ISO's(startup before IPO) for her first 1.75 years of shares when the company valuation hadn't changed. Her company went public and the stock jumped and then crashed, I think the current price per share is lower than her exercise price so she is underwater and the money I gave her is worth less as shares vs. cash I originally gave her. Really a huge bummer as this job up-ended our life and she has absolutely nothing to show for 3 brutal years of hard work. I guess the only thing is wait it out and see if the shares recover.
I advise you to think 'if I had the value of these shares as cash would I spend 100% of it on shares of this company?' The loss already happened, that part is done. The shares have no memory and won't 'rebound' like a rubber-band just because they were down before. What matters is new things that the company does going forward, relative to all other companies.
I don't think that's what he's saying. He's saying the fact that it went down doesn't matter and you need to decide now would you invest that capital in that stock.
So I think the company is solid, leadership great, product great etc. its just the stock is in the toilet, she is not selling right now, its just a bummer dealing with all the work she put in, the forced relocation, and personal money put into this company.
Most VCs liquidate most of their position around IPO except for really blowout exceptions, so that should tell you something about what the smart early money does on IPOs :)
We were in an ipo just recently with same-but-different setup:
- sold some immediately at the pop to recuperate the principal
- ... Note this may count as a short-term capital gain (< 1yr, ...) with higher taxes, so factor in. That makes a floor.
- In retrospect, I should have examined the P/E ratio and sanity checked revenue growth against growing into a reasonable P/E multiple, and raised the floor based on that difficult road, but was lazy :) There are other ways to quickly handle risk for the private/public transition: something is better than nothing.
- we kept the rest bc we liked the company long-term, incl.desired risk, vs wanting to pay taxes to diversify it. It of course went way down below the pop, and markets now stink, but everything at this point is 'free money' that we are ok with. We view it as a long-term holding so are ok with that
- If it fails to go an upswing over the next couple of years, we'll sell at a more forgiving long-term capital gains tax rate. Likewise forced to bail sooner if tanks below market.
Everything happening now is basically profit, and we are ok with most outcomes. The real risk was pre-IPO, and the rest is about profit handling. If we had held even earlier-stage shares, as in the early employee or VC case, we would have sold more.
I don't think VC money is "smart money", it's just not designated for investment in public markets. The "expertise" of a VC is in private growth equity, not liquid public stocks.
- Sure, some long island hedge fund genius is probably smarter at finance than some bay area VC for reasoning about most public companies
- But the professional VCs who have been in a specific company for 4-10 years, watching the team+category outperform 90% of the rest of their portfolio & their many competitors, and fighting for them round after round & pivot after pivot, have a much better sense of hold/sell vs some quant who doesn't know all that. That's a lot of insider knowledge for a finance professional.
It's a startup before IPO, so not liquid (unless the company offers to buy-back).
This is a great reason to value options at $0 when taking an offer. It's a lottery and you shouldn't assume you'll see any money from then. If you do, it's all gravy.
I did not miss it. My reply was to the parent post by s1artibartfast (nice HHGTTG reference), who said; "They are talking about the shares, which are already fully owned and liquid.
The question is to sell them and invest the cash somewhere better(??) or HODL."
I still do not understand your objection, since the whole thread has been about shares, not options. The options were already exercised so what they are holding onto are these now likely worthless shares.
Yeah. This is why options mean nothing. The business gives them to you and most of the time they even think they are worth something. But they aren't. Take cash. If they don't want to give you cash, you best be ok with your comp.
I worked at a unicorn startup for about 1.5 years. It started to become clear to me that I probably wasn’t going to make a comparable income to what I was making before in a public company so I left. I exercised my shares. A year later they went public through a SPAC. the shares got a hair cut through the SPAC ratio. Total comp was still really bad but shares were locked up for 6 months or so (maybe longer I don’t remember). I couldn’t sell them and now that I can the total value is under $4,000. I paid over $1k exercising them which felt like an insane bargain.
Maybe it will work out better for some of you though. I feel like if you are not extremely passionate about a startup and you are not one of the original founders… great place to learn and build your career but don’t think it will make you rich
This article uses your net effective tax rate to calculate the taxes on the bargain element -- 32.25% on someone earning $150k in California. They should be using your _marginal_ tax rate for that calculation, which would be 24+9.3=33.3% on the first 170050-150000=$20,050 of the bargain element, 32+9.3=41.3% on the next 215950-170050=$45900, and 35+9.3% on the rest.
Or, much easier is to use a calculator like the one they link[3], and calculate your total taxes on your current earnings, calculate total taxes on the earnings if you were to exercise, and then subtract.
I calculate $81,599-$38,038 = $43,561 in additional taxes, rather than the $41,893 they said.
I agree with the author's take on ISOs:
> It’s a bit complicated – and dry – so if you have ISOs you should probably talk to your tax person
My opinion on ISOs is essentially that for some middle ground between "few enough ISOs that you don't trigger AMT" and "so many ISOs that the potential tax savings are more than big enough to pay for a financial professional", it's not worth it to try and exercise ISOs early.
AMT on ISOs will complicate your taxes for years to come: in some circumstances, you can recover some of the money you paid as AMT on the ISOs in future years -- essentially, ISO bargain element is a specific category of AMT-taxable income which gives you an AMT credit for future years, which you can recover with form 8801 [4]. For several years after my ISO exercise, I was able to eat away that credit by paying the AMT tax amount when it was _lower_ than my standard income tax.
This is a fine article. It covers a lot of the decisions one must consider when considering stock options. I just think it's a little abstract for folks who haven't lived the experience.
I actually tried to enumerate the scenarios. When I hit five variables I realized the advice would be mostly worthless. That's 32 separate outcomes, some of which are pretty subjective, e.g. do I think this is a viable company?
Nevertheless, I've been down this road a few times. I have some wins and losses. I think this article misses an important point: Exercising is not an all or nothing proposition.
For example: If I join a startup and leave after a year, the difference between my strike price and the 409a price might be non-zero. I can still exercise a percentage of my options to avoid AMT. Maybe I can't exercise all of them without triggering AMT, but chances are I can exercise a fair amount.
If I'm offered an early exercise, I don't have to do 100%. I can do a number that fits my budget. I just have to make sure I file my 83b election form.
I'd like to know what to do with ~10 000 euros, right now. Where should I put it so it doesn't lose its value and keep a bit with inflation ?
edit for a bit of context: Western Europe, renting, unlikely to be able to buy/invest into a house/flat, looking at gold ingots, not the nerve for crypto.
As counterintuitive as it seems, the book actually recommends buying stocks in a bear market since they are priced reasonably. Warren Buffet's famous quote comes to mind: “Be fearful when others are greedy, and greedy when others are fearful.” The book also talks about the importance of long-term investing and discipline.
I don't know, people seem pretty greedy still. VIX barely at 30, PE10 near pre-pandemic highs, real yields negative out to 3-4 years, and markets are orderly. If you get weeks and weeks of 4% daily drops, real yields at 5%, and hedge funds being force liquidated like 2008, then you know real fear.
Ignore the "be greedy"* part of the person you are replying to (although your hesitation is kind of proving their point a bit) but follow the advice of the Intelligent Investor.
When markets go up, everyone is happy to continue to invest. When they go down? People stop investing. That's precisely what you shouldn't be doing. Staying the course and continuing to invest regularly is key. When markets are sour that's when people get nervous and alter their behavior.
* Want to be greedy? Start buying Coinbase stock and Bitcoin. Notice how everyone is scared right now?
Yeah, it's the best time to invest since ... (checks watch) ... 18 months ago. I'm sorry, at an investment horizon of 10-20 years, that's not a slick deal. I am also talking about bitcoin. If it goes to $5000 then we're talking.
I'm not sure who were investing past mid-2021, to me there was nothing at all publicly investible for the long-term at that point. You were guaranteed an inflation-adjust loss just looking at how deeply negative real rates were.
It's a question of what you think is going to happen. Personally, I think there are a lot of other people who are looking for ways to get out of cash and into something that is portable and loses value at a slower rate than inflation as well.
It implies increasing demand for alternative assets like art and collectables, and maybe small land purchases. If there's something you know about or enjoy, it may be worth just getting into buying something, like antique motorcycles, painting and sculpture, photography, classical instruments of the non-piano variety, fancy watches, wine auctions, and other niche high end collectables. Even the top level hi-fi systems from niche makers (McIntosh, Luxman, Audio Research) with limited supply look like they could still be in demand in a decade, just like a good 1970s amp or speakers still costs more than an iPod.
If these sound extravagent, the alternative at that level of investment is to buy a small crypto mining rig. Personally I would rather just take the hi-fi system or the instruments. :)
There's one caveat. Say a profitable company pays $1M dividends. With the industry-average 3% yield, this puts market cap at 32M. Currently you can get 3% risk-free with government bonds, and this number will go further up as the interest rate rises. Say, it goes to 6%. Now, in order to be competitive with bonds, the profitable company will need to find a way to pay 2M in dividends, or its cap will drop to 16M (i.e. the shares you bought will lose half the value).
and that’s why such stocks have fallen so much, as interest rates have risen. the two of you are actually agreeing with each other. the principle is similar.
This is zero sum thinking -- however many people this helps, it will take just that many getting hurt in order for it to happen. Doesn't solve the root of the problem in the least, it's just a wealth transfer.
Yup. But how many of the people who might be able to afford a home if it comes down 20% will care about the others.
This is what a market does. Risks are taken and the result is that some will lose out. People are not guaranteed profits. Until you are a corporation with enough influence in government it seems...
> however many people this helps, it will take just that many getting hurt in order for it to happen
This presumes that the number of people this helps is equal to the number of people this hurts. That's unlikely, given how wealth concentration tends to work in capitalist economies (that of the US included).
But yes, we need to address the root of the problem - the root of the problem (as applied to housing) being the fact that land is treated as ownable property in the first place. That's fine and dandy, but that produces rather nasty externalities that are long overdue to be internalized - specifically, via land value taxation.
I would just hold it - I have sold most of my index fund holdings in the past 6-9 months and been just holding cash. I don't think stocks have reached the bottom yet, so holding cash at 0% return is still better than negative returns from stocks. Right now, it's about not taking losses. I also don't see the market and economy rebounding quickly after reaching bottom - they will stay flat for a while IMHO
As a counterpoint, I would quote the great John C Bogle: "Never, never get out of the market." [1] Knowing when the market has reached the bottom is not really possible.
During the dot com crash in 2000-2001, investors sold all the way down to the bottom (and lots of them sold at the very bottom), and then they eventually sold all the way up to the peak, when instead they could have just held onto their shares.
Rebalancing doesn't really work. That's another thing Bogle showed us.
Of course, if you need the cash, that's another matter. But then you arguably shouldn't have invested it in the stock market to begin with. If you have a time horizon less than 5 years, the market is just too volatile.
Cash is a market though, just a different market. If you hold cash you're in a particular market, one that has earned significant returns measured against equities this year. (of course, depending on timespan you may want to pick _which_ market you think best)
It's been strange indeed. My highest yielding investment the past couple years was buying a new vehicle. Conventional wisdom says new vehicles are horrible investment, but in this market it's exceeded yields of every single asset in my pretty diverse basket.
In the context of Bogle's statement (and the parent's comment), it was the stock market, specifically index funds.
It goes back to the realization that no investor can predict the peaks or troughs of the market, so getting out of the market is effectively trying to time it. One may be lucky and get out at the peak and then buy back in at the bottom, but on average you will lose money this way.
Not during the last 100 years, for the last 100 years.
The whole point is you have no clue when the bear market will end, and a lot of the recovery happens in the first few days (or sometimes even just the one day) of the new bull market.
Trying to pull in or out means you miss out on the best gain days.
Bogle did extensive analysis on the impact of rebalancing (between stocks and bonds) on historical portfolio returns, and decided that it does not meaningfully increase your returns.
His main argument was rebalancing effectively switches high-returning assets for lower-returning ones. If one part of your portfolio did better than another part, why would you get rid of it just to bring the asset allocation back to your target?
Rebalancing will also generally generate capital gains in taxable accounts. If you're aiming for 60/40, but your stocks are now up and it's 70/30, selling those stocks to bring it back to 60/40 again means you will pay capital gains on whatever you sell.
The data shows you can get better returns by rebalancing weekly, but this is really too much for most investors, unless you use something like M1 where rebalancing is a single button click.
Of course, there's more complexity to this question. The above mostly applies to the accumulation phase. To someone in, or close to, retirement, for example, having a portfolio that's drifted too far into stocks can be a risk.
"His main argument was rebalancing effectively switches high-returning assets for lower-returning ones. If one part of your portfolio did better than another part, why would you get rid of it just to bring the asset allocation back to your target?"
Because of reversion to the mean. Rebalancing should insulate you from weird outcomes like 90% of your money being in GameStop stock then crashing to nothing a week later.
Pretty much every professional fund of fund rebalances, including those by the company Bogle founded. This is weird advice.
Another way to phrase the reply you have already had: because these assets are martingale.
In other words, to the extent good historic performance says anything about future performance, that effect is already priced in. This means you shouldn't hold on to a historically good investment just for that reason -- it's just as likely to be a loser going forward.
If you determined that the amount of risk you're willing to put into equity is 60 %, the only thing that happens if you let it drift up to 70 % is that you increase your exposure to equity higher than you originally intended.
Maybe you have good reason to do that, but historic good performance is not that reason.
> so holding cash at 0% return is still better than negative returns from stocks
holding stocks as they go down in price does not necessarily matter. It only matters at time of sale. Selling an index (or a particular stock or set of stocks) as they go down only to buy them again later is not the right strategy... you're incurring transaction costs at the very least and the fact that you cannot time the market means you'll probably lose out even further.
Hold the index, unless you need the cash flow or forecast that you need more buffer for flexibility and don't want, in the short term, to be penalized for volatile stock prices (e.g. in case you need to sell to service some cash needs).
And if you have the cash, continue to buy the index on the way down. If your view is that the market, over the long term, is the best generator of wealth, then continuing to buy into it is the more rational strategy.
Inaction is sometimes the best action. There are more ways to be dead than being alive.
If you can sell 100 shares today and use that money to buy buy 200 shares in 6 months then you are better off than if you had held 100 shares for that same six months as long as you buy back into the market.
Actually trying to time the market is largely a fools game, but people do get lucky. Or more often realize they shouldn’t try and time the market.
Yah and if I could buy bananas today for $1 and sell them tomorrow for $5 I'd be fairly wealthy. And if my uncle was a monkey and my aunt a banana farmer we'd all be well off.
I'm not sure if you can buy ibonds but those seem good for up to 10k usd.
Otherwise, Either a targetdate fund, I use VFIFX which should give most benefits of a bull market while giving some cushion due to its diversification.
Or, just a nice total market index fund should be a good option. It may drop a bit but it's as diversified as it gets. I use FZROX, but there are many others.
Energy/renewables. They are highly resistant to inflation. In my opinion they're the best bet over the next 5-10 years with current macro conditions and the huge ongoing investment into renewable infrastructure.
You haven't said what your time horizon is and risk appetite. i.e., For how long do you not need this money and what % of capital are you OK to risk without which it's almost impossible to advise you.
That said; during times of uncertainty cash is king so my advise is to keep it in a time deposit for 6-8 months and wait for the markets to stabilise.
Based on yesterday's fed FOMC guideline they believe there's still a long way to go before they tame the inflation and they are likely to raise interest rates as high as 4%. I don't know if markets have priced 4% in yet or not. All this is to say next 8-10 months are going to be extremely choppy/volatile.
Once you see signs of stability and recovery you can enter equity markets through DCA.
Go through the videos in Plain Bagel and Common Sense Investing (Ben Felix) YouTube channels, then read, read the sidebar in r/eupersonalfinance subreddit, and that will give you solid foundational knowledge and context for figuring out what's best for you.
So the theory here is if you know you're going to buy a $20K item in 2 years time, and you know it's going to go up in price in that time, you're probably better off borrowing the money and buying it now.
The problem of course is we often don't know either of these things, and having better cashflow, or a pile of savings, now might help you weather the coming storm.
This always seems silly to me. You are making an assumption that your Income will inflate by the same amount. But I don't know anyone getting 8% raises each year in any industry.
It still make sense as long as the thing you're buying is something you'll eventually need to buy anyway.
Say there is a 20k car you need to get to work that you should purchase within a year. Then assume, in a simplified scenario, you can either take out a 6% annual loan, or just save up the money for a year and then buy the car.
Now say the car raised in cost with inflation at 10%. In one year the wait and save will mean the car new costs $22k where as if you had just taken out the loan it would have been $21.2k.
Typically the loan isn't the best thing you can do because a.) inflation isn't that high and b.) there are other ways to generate revenue with your money if you have it one hand.
I still see plenty of those wacky startups offering 0% interest for a year. I made a $10k, necessary, purchase for my home last year using one of those and going to save quite a bit by doing that.
There's also the darker truth that if shit really hits the fan, you can always default on debt, often without real risks of your stuff being repo'd. There's no equivalent if you wait to purchase something in the future.
If you're not in the US (and Euros sounds European somehow) you don't have access to I bonds - which would be the safest bet. Perhaps there is something similar?
There's something similar but it's in the .9-1.5 interest rate before 30% off of the interests when it's due. In Europe I think you can't buy bonds from another EU country but you can buy eurobonds (which seems to be different but are still emitted by EU countries).
It may be helpful to think through your intended holding period.
As a companion to the sibling comment recommending the Intelligent Investor (realize that index funds didn't exist when Graham wrote that), I'd keep in mind the mantra, "price is what you pay, value is what you get".
If the holding-period is decades, there are good arguments in favor of stocks/index funds. Shorter-term than that, it may be difficult to provide guidance with any real certainty.
Is there some kind of inflation protected EUR denominated bond or note you can buy? If the maturity date is reasonable that might not be a bad place to park excess cash.
10k is not that much money. I know it takes a lot of effort to save, but its small change. If you have somewhere to store it, buy consumable goods.
- Several hundred dollars each of tuna, prosciutto, a wheel of Parmesan, jerky, rice, flour.
- If you have an oil/wood heater fill up the tank. If gas buy plenty of wool sweaters.
- If you have to drive to work, get a scooter.
- If you live in Czechia, or Finland, (you're not Swiss I gather) a rifle, shotgun and/or pistol. Otherwise upgrade your locks
- Any left over money (if any) buy an assortment of gold, silver and what not.
This might all seem doom gloom, and it is. But inflation is the least of our concerns. We're headed straight to an early 90s Soviet style collapse of our economies.
I can’t really agree with your prognosis, but honestly this advice is amazing because outside of the apocalyptic context it’s so fun. Got $10k? Buy a scooter, prosciutto and a wheel of Parmesan!
Why shouldn’t I spend like an Italian small-town bachelor in 1975, if the world is ending anyway.
It's perhaps worth noting that this the article is very US-centric. I'm in the UK, and I've never had an opportunity to exercise options that didn't come alongside an offer from the company to buy the shares. And in my experience, it's rare to exercise and hold. Even if you do, you can sell enough shares to cover the tax and keep the rest.
My current employer has (and uses) the right to repurchase any shares I hold at the current "fair market value" if I leave the business. That's also fairly standard for privately-held companies, it seems.
Right now you want to be vesting in a promising company that is well funded and has revenue streams coming in. We are in the early days of creating the new winners of the next bull market.
Options give us 'regular folk' exposure to private equity, which comes with potential for very high (& improbable) returns. As a salaried employee there's really no better vehicle for this kind of exposure. You'd need to start your own business, or play with leverage - which is dangerous.
That said, the common adage of 'winning the startup lottery' is very true. The likelihood of actually (i) joining early enough, (ii) getting a reasonable grant, (iii) having market conditions work in your favour, (iv) the company growing exponentially for years, (v) you actually being able to stay the 3-4 years to vest enough options, and (vi) a liquidation event happening .... is quite low. Most, if not all, of these factors need to happen together.
I'm currently at a unicorn SaaS startup. I have 11,500 ISOs, about 7000 of which I've vested and exercised (I've got about 1.5 years left till I'm fully vested). My strike price is $1.50, which to me is a bargain, especially since there was a tender offer last year of around $14. There are ~70M outstanding shares.
Other stats: $60M ARR, 120% NRR last year, almost 100% YoY growth during 2021, raised $110M at 40x revenue last year, high NPS, company still has over $110M in the bank, TAM is in the tens of billions, current market penetration is <5%, planning to go public at $200M ARR. So the potential upside is huge.
Work environment is great, I have a great boss and a decently challenging/significant role. I'm a senior engineer making around $170k/year.
I'm curious what you all think - is it worth the risk of staying until I vest? The alternative would be to join a public software company and increase my salary significantly (which would help so much right now - we need a larger house for our kids).
Extremely simplified thought exercise with very rough possible #’s:
Vesting 2,875 shares per year
2,875 @ $(14-1.50)= $36k/yr
Assuming IPO @ $200MM ARR, public cloud SaaS benchmark rev multiple was roughly 20x last year before the crash.
That’s a $4B valuation, ignoring dilution from here to there:
$4B/70M shares = $57/share
2,875 @ $(57-1.5) = $160k/yr
That’s assuming the market recovers to a similar level, ignoring further dilution, assuming the company continues executing and doesn’t hit unforeseen difficulties, etc.
Can you make that much with less risk by changing jobs?
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Another consideration might be diversification if your vested options represent a large % of your portfolio.
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Another consideration, “work environment is great” isn’t something that everybody can say and this might be worth more than the raise.
The big thing to avoid is exercising at a high price, paying all your taxes, then watching the shares plummet the next year, and eventually selling at a loss and winding up with only the maximum carryover cap gains loss every year after that.
So the worst outcome is that your strike is $1.28 you exercise at $3.13 (costing you $80k + $40k in taxes or whatever -- it gets worse the better the stock is doing, which is one of many reasons why early exercise of options is risky but good) but you're stuck in a holding period while you go public, then when you exit that period you're at $0.50 or something like that, and you've passed over into a new tax year, and you have no cap gains to offset the losses on the stock.
This happened to a lot of employees at dot com companies in the 2001 collapse.
Well, if you're at a startup which hasn't gone public yet, then really it depends on what the strike price is, what the fair market value is, what your confidence in the startup is, what funding rounds are expected, what your tax situation is, etc. I think the relationship between these variable is more important than just recession vs not-recession. Also, if they're cheap and you believe in the startup, just buy them.
> Fairly sure maybe half of MANGA knows what leetcode even is. I for one don't know what it is.
https://leetcode.com/ is a website famous for listing a repository of programming exercises that you can solve by implementing an algorithm categorized as Easy, Medium, or Hard depending on its complexity. Many technology companies, including, but not limited to, Facebook, Amazon, Apple, Netflix, and Google, (aka. FAANG) use the same type of problems during technical interviews to evaluate candidates’ problem solving skills.
Then why are you asking what leetcode is? I’m literally telling you that the process google, meta, and Amazon (never worked at apple or nflx so can’t speak to them) follow is programming challenges that require some algorithms and data structures knowledge.
This is known in the industry as leetcode because the leetcode website is entirely dedicated to practicing said problems and has entire categories dedicated to the leaked algorithms questions from these big companies.
I get your point -- most people don't really know what stock options are or that they are different from shares -- but options grants and RSU grants are both grants.
I do interesting stuff in my free time. I make money in my work time.
Not quite really—I do enjoy my work and my time at my job, and I would sacrifice some compensation to work at a more interesting/meaningful/fun company. I don't price the enjoyment of 50% of my waking hours at zero, of course. But my primary purpose in working a job is making money, and I don't think that's anything to be ashamed about. I want to buy a house one day.
Startup equity will always be worthless for 99.9% of people, and the second it's worth something more, it will be lawyered away from you. So from a business perspective, you should never work at a startup if you're not a founder.
This is why I choose to not work for companies that do not have extended exercise windows -- and IMO neither should you.
[1]: https://blog.samaltman.com/employee-equity#:~:text=2)%20Most....
[2]: https://github.com/holman/extended-exercise-windows