Startup equity cash-out decision
Author Topic: Startup equity cash-out decision (Read 1109 times)
Hi Stachians
Excited to write my first post. I have a very first world dilemma, and I’m curious to hear your input.
A few years ago I went to work for a startup as one of the first employees and was lucky enough to get a little piece of equity. The company has since taken off in fairy-tale fashion and eclipsed everyone’s wildest dreams. The company is still pre-IPO but may go public in a year or so.
My shares are currently worth 7.5M on paper. I know... very lucky! This number is according to an investment bank the company hired to do a valuation. Of course, there is no liquid market for the shares, so emphasis on “on paper”.
However, it looks as if I might have the opportunity to sell some or all of my stake to a private investor at a bit of a discount. Approximately 5.5M is the ballpark figure that this party would pay for the full stake (25% discount from current FMV). After taxes (capital gains, thankfully), that would be 4M in my pocket, give or take.
My current financial situation: Have 1.85M stache, recently retired, mid 40s. Spending about 3 - 3.5%.
Company outlook: Profitable, semi-stable, semi recession-proof. Definitely a lot of risk but it’s not like late-90s .com-level risk. Internally (I’m still close friends with some of the executives) the outlook/forecast is bullish. The insiders believe the inevitable IPO will fetch valuations 1.5-2 times the current valuation. On the one hand, they are smart and have good reason to believe that. On the other hand, they’re still in the company bubble and have a bullish bias.
So…suppose the IPO sees a valuation 2x the current and I don’t sell now. Then, at IPO time, I’m looking at 15M pre-tax and 11M post-tax. But maybe it goes 3x, or 5x, etc. Or maybe 0.1x, who the hell knows?!
Anyway…I’m trying to decide how much to sell now to this interested party. I’m leaning towards half. That would mean 2M in my pocket (post-tax) now and take a flyer on the rest. But part of me thinks that’s crazy; that I should thank my lucky stars and just take the full 4M now. The risk of that is FOMO if it ends up that I could’ve had 20M or whatever down the road. Is that going to bother me? I don’t know. My insider friends think I'd definitely be leaving money behind by selling at this discounted valuation.
Like I say, first world problem. How much would you sell now? 0? 1/4? 1/2? All of it?
Re: Startup equity cash-out decision
What would you do differently if your liquid net worth were $4M higher? $10M?
Congrats from one corn-based-username to another!
Stuff like this is always tricky, because the traditional advice is based on optimizing trade offs between risk and return assuming each potential dollar is equally valuable to you. Based on that logic I would say it's a great idea to diversity out of a single untraded stock that currently constitutes 80% of your total net worth, even if you have to take a bit of a haircut on the valuation.
However, since you're already financially independent with room to spare, how would you use $2M if you had it today? What about $5M? $10M? You may find that doubling your liquid net worth may not actually provide you much additional happiness/utility. If so, you may be in a better position to roll the dice on waiting for an IPO and seeing what happens than most people since you've already "won the game" financially speaking.
Quote from: Can_of_corn on January 27, 2019, 06:49:03 PM
As someone with equity in a firm that just closed a series A I'd lean toward cashing out more than half, personally, without knowing more about your company. I've seen way too many companies achieve high valuations only to crash and burn within a year. If the amount of money is life-changing for you I'd take the sure thing. Hang on to 25% just in case, and so you don't wind up with regrets. If your company lives up to expectations that 25% will be plenty.
Now, you know more than I do about your firm's prospects, and if you think them really bright you might choose otherwise. But you should also think about the marginal value of money to you- the first few million will make you a lot happier than the next few.
Thank you Sverian, Maizeman, Shoulder. All good advice: I do need to think deeper about how it would be used and probably at least take half (2m) off the table now.
If I cashed-in 1/2, the added 2m to stache with no spending increase would push the SWR down to 1.4%.
Some chance 1-2 kids will happen. Say that's 800K expense including college. Now SWR is 1.8%.
Add 10K/yr extra travel (SWR = 2.1%)
Add 10K/year gear/material for projects (SWR = 2.5%)
Add recreational land, say 400K + 10K yr expenses (SWR = 3.2%)
3.2% SWR is about the edge of my comfort zone.
From there I would use remaining cash or stock to increase the amounts on the above life-frills (which I do think would have meaningful utility), excepting the kids part. So I could see going either way with cashing in the remaining or not.
Thanks again for the replies. Going through this exercise is helpful.
« Last Edit: January 29, 2019, 01:38:41 PM by Can_of_corn »
Hmmm, I’m going to go mustachian here for a second: you’re telling us you need at least 4 million to live your best life? Seriously? I’d suggest reading more of MMM’s articles. It seems you’re spending just to spend. You can have a great life with less. Your current stache is more than enough for a great life. You have enough. You have more than enough. What life do you want to live? Live that.
Not saying I "need at least 4 million to live my best life". I need what I have, which is why I'm retired.
Money in excess of needs still has utility (with diminishing returns).