Ask HN: Company is firing all employees – should I still exercise my options?
About 2.5 months ago I left my executive position at a promising blockchain startup. As I am nearing the end of my 90 day period for option exercising, i've come to know that the company sent out prior notice to all employees a few days ago, as it is struggling to raise money. All 3 founders are at work trying to raise capital in the upcoming month before money runs out and they are also planing on continuing to do so after all employees leave. On one hand, I am very hesitant to exercise because of the current status. On the other hand, the company has a remarkable product (which they might decide to sell) and the industry is still very much in it's diapers, meaning there is tons of true potential.
i have a lot of faith in the founders but the recent news really threw me off. Would love to hear your thoughts!
More information: -Company size: 15 employees -Exercise price: $20 (679 options/2.3% of the company) -Company raised from several VC's and also via ICO. -I still hold company's digital currency. -Status: recently launched product (fully functional) after 1.5 years of development with very few customers but high growth rate.
I don't know your financial situation. Maybe $13K isn't much to you. However, I probably wouldn't buy these shares for the following reasons:
1) The company just fired all of its employees
2) The company just fired all of its employees
3) The company just fired all of its employees
That's a really bad sign. Even if they raise additional money, it likely won't be on good terms. With the price of bitcoin way down from it's peak, and much of the "fools" money in this space dried up, I can't imagine that a company who is so close to the edge that they have to fire all of their employees is going to get great fundraising terms.
But take my advice with a grain of salt, as you obviously know and understand the company better than I do.
As an aside, the fact that you are asking here likely means that you have an emotional investment in the company. I get it. If you really have FOMO, you can always split the difference and maybe exercise half the options, or whatever amount you wouldn't mind losing. I once exercised a few thousand dollars of options knowing that it was a bad investment, but also knowing that if I was wrong and the company did well, I'd have a terrible regret. And it's purely because I worked there for a few years... it's not like I obsess over the fact that I didn't make an early investment in Amazon (where I never worked), even though logically that's the same thing.
Almost certainly any new money raised would be on terms that wipe out nearly all existing holders of equity.
https://www.investopedia.com/terms/c/crammeddown.asp
Thanks for your answer! You hit the spot with some things. I am definitely emotionally involved with the company and considered the option of exercising only some of the options - that might be the best option at the moment. One thing to point out is that there is still a month worth of raising time (with all employees still in the company), which is significant in startup terms.
Even if the company did sell, it could be at a fire sale price and you could be inline to get paid after investors, founders, etc. IIRC, the term is Liquidation Preference. I held options for about 0.5% of my company when it was sold. They were worth $0 due to such preferences.
> I am definitely emotionally involved with the company
If you can find objective metrics that justify investing, great. But if the majority of your decision is emotional it's probably not a great choice.
I would look at what they're doing not what they're saying. They're playing up their opportunities, but firing everyone. The actions speak louder than their words.
Almost every startup has a great idea, a great product and a great team (and if they don't they will still sell you on the idea that they do have all these things).
What great startups have is all of those things plus great market fit plus great adoption plus great investors.
If it's all show it's a no go.
I would say "not really". Trying to raise with such terrible optics is not going to be a fast process.
This. Maybe you have faith in the product and the IP, but these are worthless if the people who can help transfer all the knowledge to a possible acquirer are gone.
If the founders were the only engineers maybe there's still some chance that they can manage an acquihire for themselves, but it would be worth pennies, and any transaction will likely be below your option execution price.
Firing all the employees is a rather transparent signal that liquidation events (or any financial events) are off the table, and founders are simply debulking expenses to kill the company.
Also, the simple and straight forward solution to your problem is simply to ask them. These might be hard times for the founders but a short and candid message asking about the situation wouldn't hurt. They probably don't want you or anyone spending their money in a dead company.
> it's not like I obsess over the fact that I didn't make an early investment in Amazon (where I never worked), even though logically that's the same thing.
I have a friend who was first 50 at Amazon and let 50,000 Amazon options expire. He still did well but... FOMO is a real thing. $1000 is probably my cap in this situation however.
You forgot:
4) The company just fired all of its employees
/s. An amusing and thoughtful response!
$13k for 2.3% of the company is one thing, but how about $13k for 0.023% of the company? Your company could be headed for a "washout round".
In the end it's a question of how dear that $13k is to you. If you've got millions in the bank, do it. If gathering that $13k would require you to max out a couple of credit cards and call in your last couple of favors, then don't do it.
Wherever you lie on that huge section in between is going to determine your decision, I think. There are a couple of companies that even for nonpublic stock will buy your exercised units, so if they value each unit/share at $200 then this is a simple decision: exercise and sell (some or all).
Alternatively, you might be able to stretch that $13k a lot further by investing in the next round. Get a good finger on the pulse of the ask price and see how low they'll go before they give up. Your $13k may be the lifeline that buys the company the 15 days it needs to not die, and should be valued accordingly.
If you want to take a long shot bet on something I'd just take the 13.5K and place some ridiculous march madness bets. I'm damn near convinced given the info here that you can get similar odds / price with however you wanted to structure those bets, and you can find out within a few days/weeks what happened as opposed to having that money locked up for who knows how long.
I'm mostly kidding, but also not really -- I would seriously put some thought into whether any part of you thinks that this is really a unique investment opportunity, if you're really on some "inside edge" or discounted price given the admittedly subpar position of the company, and if this really differs in any marginal way from any other more liquid form of speculation or downright betting. I don't have the details but this screams "poor financial decision" from where I'm sitting.
Just a bit of reading between the lines (from your previous postings ;-) ): Yeah... I wouldn't touch those shares with a ten foot pole while wearing a hazmat suit (the goggles, they do nothing!)
Unless I'm inter-line-reading incorrectly, the company raised $1m giving away 50% of the cap table. They ran out of money and pivoted. Loaded labour rate of about $150K initially I guess... Then raise money from an ICO -- must have been something around $3-4M given the 15 employees now. That money is gone. Originally 2 founders, now 3 (cap table is shrinking). I think there is no way at all that they will be able to raise money. Even if they sell the IP, it will be a fire sale.
This is not financial advice. I am not any kind of financial expert. I can't tell you what to do. I might be entirely wrong, but I don't see recovery at this stage, no matter what the business is.
LOL. loved your comment! You hit the spot with your assessments and thanks for doing the research behind it. I think I should probably run best and worst case scenarios with the cap table alongside me. I agree that from the looks of it, it's pretty risky.
How much is $13k to you, as a percentage of your net worth?
If you believe in blockchain and want to make an extremely risky, but potentially high payoff, bet, I'd personally just split the 13k across BTC and ETH. Those can also go to zero, or grow another 10x+, but you are at least exposed to the entire industry, rather than a single startup. The investment would also be far more liquid, and you could sell at anytime. Even the most successful crypto startup (Coinbase) hasn't done as well as an investment in BTC.
Don't get trapped into overvaluing the options because you already own them. If you had never worked at the company, and they called you today asking to buy 2.3% for $13k, would you do it over buying BTC?
This would be my advice as well. If you're determined to throw away $13,500 on some blockchain-themed boondoggle, this is a better drain down which to tip it.
Past performance is no automatic guide to the future, but speculating on Bitcoin has often turned out pretty well. Sounds like speculating on the company you used to work for, by contrast, will have reliably turned out poorly.
> - blockchain startup
> - struggling to raise money
> - tons of true potential
Run.
My sentiments exactly.
From promising startup to out of money in 2.5 months? As an executive, did you not have insight into these things?
Crypto prices took a serious beating these last few months. I can imagine most of the company’s assets were in cryptocurrency.
But it is decentralized.
Run in all directions.
Spreads like a virus.
don’t forget that they are also now mostly without staff.
I have done this before, more than once. Some companies were in better shape, some this bad. Every one of them failed. Every dollar I spent was wasted. You may get different results.
Don't kid yourself into thinking this is a good bet. It is a huge gamble that most likely will not pay off. If you can accept that and still want to do it, go ahead. If you don't want to take the risk, don't.
Couple of perspectives you could take. Here are two:
1: Would you be willing to invest $13K into the company right now with your own money in exchange for 2.3%?
2: What are the most extreme odds you are willing to take for
[ X % -> $50K+ , Y % -> $13K , Z % -> $0 | X+Y+Z = 100%]
Then figure out what others are saying the chances of X and Y are.
P.S. My (generous) uninformed bet would be X=1-5% and Y=30%
I would exercise at least a single option, or whatever 'gambling play money' you have.
If the company eventually unicorns, you will regret having been a part of it but not benefiting financially at all. Even a single share could be a consolation and may actually end up valuable.
If you max out all your options, assuming that's more than your 'play money' budget, you may much sooner regret the decision if the company tanks in a month or two which seems like a definite possibility.
Very, very few companies do well after a large firing round. What I would look at is how they handled the firing. Did they do it respectfully? Did they apologize or did they blame the people who they fired? Is morale still high after the process? Did the founders handle the firing themselves or did they outsource it to someone?
Generally the companies that have done turnarounds after a firing round have done it respectfully. Often morale floors after a bad round, smart people leave, remaining people are unproductive. Combined with whatever reasons triggered the firing, most companies don't recover.
As others have pointed out, you’re going to get diluted tremendously if they raise another round.
When a startup is trying to survive they’ll give up a tremendous amount of equity because the alternative is 80% of nothing or 40% of something.
Does that $13k hurt you to pay out? If it’s not that painful, you can weigh that.
For what’s its worth, I didn’t exercise my options when leaving the last two companies and I felt so sick to my stomach when the last one sold for a couple hundred million but then I looked & saw they sold for less than their last valuation so my shares would’ve been even more watered down in value.
1. Setting the exercise window to 90 days instead of a more reasonable window (measured in years) should be a strong indicator that whoever is structuring their deals is not at all interested in the welfare of your equity.
2. You no longer have a seat in the company (much less at the deal table).
3. Their desperation will be apparent, and they will accept very bad terms in the round (firing your staff = no leverage).
Even if they manage to stay in business, your investment is unlikely to be worth anything. As someone else said, would you really want to invest in this company if not for your history? Why not put that $13k into another investment?
A 90 day exercise window after leaving a company is the most common situation I've seen
The trend is to move to 10-year exercise windows. Plenty of arguments to both sides, I suppose.
yea this is just standard
Personally I wouldn't touch it. We're going on 10 years of 'blockchain' being inappropriately applied to anything and everything and you can still count the winners on one hand. It's illegal to set money on fire... but that would probably have a better chance of paying off. This is not financial advice.
The only winners in the blockchain game are the scammers who are laughing all the way to the bank with all the dirty fiat handed to them by a bunch of naive rubes.
Everybody else, including all the spectators, lose. After all, those coal fired power plants dump a lot of crap into the air to power the energy hog that is Satoshi's Blockchain.
> promising blockchain startup
This can't be a serious post
I am convinced most blockchain startups are solutions looking for problems. Yes, there are exceptions... Maybe this person is involved with one them?
There are exceptions or there could hypothetically be exceptions one day?
I agree with the latter
If the former, please provide examples. I am all ears
I was thinking more of the latter. I'd be interested in hearing more details on the company...
Yeah. "Promising" and "Blockchain" won't work in one sentence in this context.
Yes, at some point over 90% of blockchain companies had lots of talk and less to show for it. Without getting into too much details, this company is not one of them (according to many articles and observations of other people..not my subjective thinking alone).
Well yeah, I've read that so often now, it has just become part of the bubble.
Blockchain industry . . . firing employees . . . few customers.
I wouldn't bother, you're going to lose your money. If the company pulls through, or finds a buyer for their product, it's highly likely they will play games and essentially extinguish your shares.
Why would you exercise them? Literally throwing away 13k on a company about to implode. The best you can expect is another round allowing a pivot making that 2.3% .23. Pass.
Without knowing anything about the product or your engine of growth it's hard to give any meaningful advice. Especially since people seem to slap the word blockchain on anything to get potential investors excited.
Assume the company succeeds. You’ll probably get screwed out of your current “2.3%” unless the founders create investor FOMO, which it sounds like they can’t.
I’d stay in touch with the founders.
How would you feel, and what position would you be in financially, if you exercised your options and a month from now the company simply went out of business? Consider that a very real possibility. This does not sound like a company that’s in a good position to succeed.
> About 2.5 months ago I left my executive position at a promising blockchain startup
And that's exactly where I stopped reading.
The simple answer is no. Run away. There's no such thing.
This might be besides the point, but isn't it strange for a company to issue ~25,000 shares total? More to the point, it seems like this (and almost all) crypto companies will rise and fall based on the price of crypto. You might be better off just buying a few bitcoin with your money.
No one's mentioned this yet, but if you do exercise it may cost you more than $20 a share. In the US at least you need to pay taxes on the difference between the exercise price and the fair market value of each share. If FMV > $20, the difference is counted as income by the IRS.
Not correct for ISOs.
A quote from somewhere:
>Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that "the time to buy is when there's blood in the streets."
But I don't think even he meant all the blood. :) If your company is firing all of its employees, then I would say it's not pining, it's passed on. It's no more - ceased to be. Expired and gone to meet its maker. Bereft of life. R.I.P. Kicked the bucket. Shuffled off this mortal coil. Joined the choir invisible.
This is an ex-company.
Loved the Monty Python reference :)
If you had $13k to spend and felt like making a wild bet I'd just dump it all into AMD right now and sleep like a baby for the next few years.
As someone who has invested in over 100 startups, I can absolutely guarantee that every single penny you would spend buying those options would be lost.
You are buying common. The investors have preferred. You won't get a cent from a sale of the company.
Additionally, the founders will not be able to raise money in this situation even though VCs coffers are overflowing right now.
If you have a lot of faith in the founders that's a great sign. Good teams can always pivot. However, if they fired everyone and don't have any money then their pivot might be a new company. It also sounds like that their best bet currently is an acquihire that won't be worth much. But you never know.
Read your agreement again, carefully - maybe you got lucky and cashless exercise is available to you.
Calculate the amount you afford to completely lose right now. Exercise that number of options. In your personal mental accounting, set the options value to $0. Check back with the company in a year or two, expecting nothing. You might be surprised
Hard to answer without more details- there are a ton of negative signs here but with the whole crypto market down, this might also be a good opportunity. Contact details in my profile if you want to chat with a crypto founder about it.
What's the growth trajectory of a company that lays off all of its employees?
It really depends on your financial situation and what $13K means to you. I would probably hedge my bet in case the company does succeed and you end up kicking yourself. Maybe exercise some part of it, not the full $13K.
Blockchain has really cooled off. If the founders didn’t sell ETH at the peak their capital raised is now down 10x. This is the same reason a lot of ICO companies are shutting down.
I’d run away OR buy 50% just for fun.
Exact things happened in case Slack. When they were pivoting.
The fired all their to leave an impression (to existing employees) there is no point of exercising the stock and then after 2 months re-launched as Slack.
Food for thought.
> promising blockchain startup
Yeah... sure. You kinda shot yourself in the foot here.
Nah. If you believe in crypto, just use the money to buy BTC or something else.
The only other situation where I think it could make sense is if you plan to write it off to offset capital gains elsewhere.
Are they trying to raise money at higher or lower valuation than your options? Taking liquidation preferences into account are you getting a better or worse deal than the investors?
Would you buy a 13K lottery ticket? If you have enough money that you would go ahead man, but the chances of striking it big probably aren't much better at this stage.
The company is literally dead in the water. Unless you have some information leading you to believe they will be bouncing back, there is no point in exercising.
I'd run. The only chance the company sells at something that makes this worthwhile, is if they take on more investment and dilute your value significantly.
Your options will be diluted to practically nothing - the best case is that you get your money back. You're better off investing the traditional way.
If you have a few $m in the bank, go for it. It's a loss you can write off on your taxes. Otherwise run away. If they are laying off and desperate to raise funding the next round will dilute your % so much to be worthless. I am on my, hum, 6th startup, making millions on one, 3 crashing and waiting / zombie on 2 others. It is all a risk game, easier to play if you already have the buy in stake. If you do not, do not bet the pot on a suite pair in the hole.
> It's a loss you can write off on your taxes
Investment loses aren't tax credits. You don't magically get all the money back. You'll only "get back" whatever your marginal tax rate is. You'll still be out the remainder of the cash you forked over.
Losses from investments may be used as tax deductions if the conditions in the tax law are met.
Tax deductions aren’t tax credits. Investment losses are deductions not credits. It is a huge difference.
“Writing off” a investment loss only reduced your bill by the marginal tax rate of your loss. If it was a credit, you’d be marking down the tax bill by the entire amount of the loss, which isn’t what happens for investments.
To many people think that something being deductible makes it “free”. No. They basically give you a discount for the item equal to your marginal tax rate.
Note: I am not a CPA. Please see one before doing your tax if you are confusing credits and deductions.
My quote was from a document prepared by a CPA. I agree with what you said - you need to check, but in most cases, someone in the Bay Area making the typical pay can write off a loss from a startup over a period of a few year. Your milage might vary.
NOPE. At best, all existing shareholders will get wiped out. Your options are worthless. Don't exercise.
Sell them to a VC with the option to buy back half at some price. VC gets more pie, you avoid losing upside.
Run away. Put the money in a 'blue chip' crypto if you think that's where the money is.
No. It isn't worth anything.
Exercise a percentage... say, 50%. Put the rest in a more liquid investment.
I have a bridge to sell you
I notice that you fail to mention revenue. That’s a red flag.
are your hopes the company will sell to a larger business, and you will receive a large payout?
sorry for the question, just don't know a huge amount about this stuff.
Yes, at this point I believe the company might sell the product or manage to raise sufficiently to rehire employees and exit at a later stage. In the first scenario the payout will not be as big, but it might still be significant.
Or the payout might be less significant than the amount you paid for your options
Consider that (i) based on what you've told us the original VCs have declined to put any further money in to keep the company alive and have therefore probably written off the entire investment and (ii) any buyer probably needs to hire the founders for a couple of years to actually be able to use the IP, and therefore wants to apportion a sizeable proportion of any money they're willing to pay for the IP to their earnout package rather than compensating shareholders and creditors of the dead company.
And the product apparently doesn't generate non-trivial revenue and was built in 18 months for ~$3m by a team who are all available for hire, so it's not like there's an obvious reason for another party interested in the space to pay massive amounts for the IP - remarkable or otherwise - even if there wasn't pressure to conclude a deal asap...
I don't think crypto technology without the devs who wrote it is a very marketable thing.
You'd basically have to audit and reverse engineer a ton to even get back to where the product was before firing.
Either they've already struck a deal and the buyer didn't want all the employees, or that company isn't selling, IMO.
VCs generally have liquidation preferences on their shares, so if they put in $1m they will get their $1m back first if gains from a product sale are not in excess of $1m pro rated to their stock position. Something to keep in mind.
It's brutal to fire all the employees and survives themselves / business. But guess you're right, the next move for them might be making some money from selling the product OR raise another round.
Blockchain is a meme.
“Promising blockchain startup”
here's a few perspectives:
zeroth perspective: there are many alternative assets and asset classes for investing your hard-won capital , benchmark any decision against standard alternatives, such as investing in real estate, buying into passive ETFs of the world stock market, buying options of highly-liquid public companies that run at a profit and have years of audited financial reports you can read to help you determine a fair valuation, etc.
if this was a company with a liquid options market, you could sell your options, and with the cash from selling them, consider investing in some new options with a longer expiry time and more attractive strike price -- say +12 months, not 90 days. is anyone willing to buy your options? for what price?
you could attempt to do some discounted cash flow model of the company: e.g. does the company have enough cash and resources to limp along burning cash slowly until its revenue has grown enough to run at a profit? how long might that take under pessimistic or optimistic assumptions about revenue growth? this analysis would be hugely speculative and sensitive to assumptions, but might help you come to a conclusion. to make the analysis simpler you could assume that you own 100% of the company and there are no other shareholders and try to figure out what you think the company is currently worth to you, if you were the sole owner. if there's basically no chance that the company can become profitable without taking a large amount of new investment then arguably the value of the company it its current form as a going concern is zero, although it may have some small value if the company were liquidated immediately and any residual cash left after paying off creditors was distributed to shareholders.
if your rough valuation of the current value of the entire company is less than $590k = 20 * 679 / 0.023 [1] then the intrinsic value of your options is $0 and the remaining time value of the options is rapidly approaching $0 if you are nearing the end of the 90 day exercise window. This is fine, it just means that the financial instrument you currently own, these options, are currently almost worthless and are likely to become completely worthless in the very near future [2]. There are plenty of other far less speculative ways to invest that have a far better chance of giving you a modest return on investment and not destroying your capital.
another angle: let's assume the current value of each option is approximately $0 and ignore them. if you are open to the possibility of investing some of your capital into this startup, instead of becoming a shareholder, would it be a better idea to instead become a creditor? e.g. supposing you had $20k cash you were open to investing, do you think the company would agree to terms where they get your $20k and you become a bondholder with a bond entitling you to e.g. 20% dividend payment per year for n years then full return of your initial $20k capital, and status as a secured creditor with the first claim to any remaining assets when the company goes bankrupt? Supposing the company were having a fire-sale of its assets, how much would you pay for the IP (or the desks or other physical assets with resale value...) [3]
yet another angle: on an unrelated note, you say you already hold the company's digital currency. how much is this currently worth in USD? if it is worth > $0 USD, can you sell this digital currency in exchange for cash? failing that, can you sell this digital currency back to the company to cover the cost of exercising the options?
[1] this assumes each option is for 1 share in the company not 100 shares in the company, as would be the case for options typically traded on the market ... if the latter case is true it would cost $20 * 100 * 679 = $1.36 million to exercise the options, and would only make sense if you valued the company as currently being worth more than $590m
[2] worthless in an optimistic scenario where you refrain from exercising the options. if you exercise when the strike price is above the value of the underlying share, you destroy the time value (maybe slightly more than zero), and take the immediate loss for trading $20 cash for a share worth less than $20.
[3] this is almost certainly not a sensible scenario but thinking about it provides quite a different perspective. If you are willing to invest, is there some way to structure the investment so you win or don't lose too much in the high-probability scenario where the company goes bust?
Thank you for taking the time to write this! Extremely helpful and thought provoking. I did not consider the option of leveraging my high amount of the company's crypto (which is indeed worth > 0$.
No
Can we start flagging the rich people threads?