Great article. To your side note - Yes Andrew could theoretically exercise now, but he would have to come up with $328MM in cash in order to do it. Banks won't lend against unexercised stock options, even for public companies. So the only way for him to get that much money (other than robbing the bank) would be to "cashlessly exercise" or sell stock to get the funds he needs to exercise his remaining stock. Depending on the 10B5-1 trading plan, they may force everyone to do this anyways. If he could rewind the clock (hindsight being 20/20), another option to fund his original $268k bill would be through private stock financing. In addition to SecFi, there's also Quid (my employer), LiquidStock, and ESO Fund who specialize in these types of financings.
1. This is a very easy post-facto analysis. If he had had the company loan himself the money in 2015, and the growth had not provided a billion-dollar exit, or if preferences from further fundraising plus a weaker outcome had made his stock valueless, he would be on the hook for the loan. Even if the company forgave the loan, that would be considered income and he would have owed taxes on the forgiven loan.
2. The idea that it is "a loss" to pay taxes is a deeply selfish message.
I have been on both sides of this issue - exercising early and ending up with worthless shares or exercising late and having a big tax bill. And I know people who have lost or are losing their homes because they exercised options during the COVID ecom boom and now the shares are essentially valueless.
Not to say he made the right choice, but at least tell the whole story. Maybe "$125M choice" instead of "$125M mistake"
Matt - not all loans are created equal. While this is true of a company balance sheet loan, non-recourse financings provided by funds (Quid/SecFi/LiquidStock) assume the downside risk that you just mentioned. Financings shouldn't be considered income either because these financings aren't truly debt (they're securities) therefore can't be considered cancellation of debt income. With the friendly disclaimer to run this by your CPA!
I would definitely run this by a CPA. And of course there would be other costs involved in a job-recourse loan, as it is not a charity.
My point is that the CEO made plenty of money, and it is not as straightforward a decision for almost anyone. The reality is most founders should have founders stock which is not options. It is weird to have large numbers of options as a founder. That is frankly a more interesting, nuanced discussion.
1. Yep. Stock option loans are certainly not without risk. For a relatively small amount for a CEO it often makes sense. I called out that there are risks in both early exercising (or regular exercising private company stock options at all) and with company loans. Company loans should typically just be for the founder/ceo in circumstances like this -- not for the general employee base
2. Not sure where the "stupid" comment is but I 100% agree that every situation is different and not everyone should early exercise. By default people should assume their private company stock options are worthless (I have said this several times in past posts) and more like a lottery ticket. Only exercise (and pay the taxes on) what you are comfortable losing.
"Founder's $125M Choice" just didn't have the same ring to it :) But get your point.
But I included language that this could have been a choice and that these decisions are complex and a tax/financial advisor should be consulted. The post's point was to alert founders to these potential tax implications so they can be aware of them and make informed decisions. Not to say someone should exercise or not - this always has to be evaluated based on personal and company circumstances.
Great article. To your side note - Yes Andrew could theoretically exercise now, but he would have to come up with $328MM in cash in order to do it. Banks won't lend against unexercised stock options, even for public companies. So the only way for him to get that much money (other than robbing the bank) would be to "cashlessly exercise" or sell stock to get the funds he needs to exercise his remaining stock. Depending on the 10B5-1 trading plan, they may force everyone to do this anyways. If he could rewind the clock (hindsight being 20/20), another option to fund his original $268k bill would be through private stock financing. In addition to SecFi, there's also Quid (my employer), LiquidStock, and ESO Fund who specialize in these types of financings.
In fairness, there are two other considerations:
1. This is a very easy post-facto analysis. If he had had the company loan himself the money in 2015, and the growth had not provided a billion-dollar exit, or if preferences from further fundraising plus a weaker outcome had made his stock valueless, he would be on the hook for the loan. Even if the company forgave the loan, that would be considered income and he would have owed taxes on the forgiven loan.
2. The idea that it is "a loss" to pay taxes is a deeply selfish message.
I have been on both sides of this issue - exercising early and ending up with worthless shares or exercising late and having a big tax bill. And I know people who have lost or are losing their homes because they exercised options during the COVID ecom boom and now the shares are essentially valueless.
Not to say he made the right choice, but at least tell the whole story. Maybe "$125M choice" instead of "$125M mistake"
Matt - not all loans are created equal. While this is true of a company balance sheet loan, non-recourse financings provided by funds (Quid/SecFi/LiquidStock) assume the downside risk that you just mentioned. Financings shouldn't be considered income either because these financings aren't truly debt (they're securities) therefore can't be considered cancellation of debt income. With the friendly disclaimer to run this by your CPA!
I would definitely run this by a CPA. And of course there would be other costs involved in a job-recourse loan, as it is not a charity.
My point is that the CEO made plenty of money, and it is not as straightforward a decision for almost anyone. The reality is most founders should have founders stock which is not options. It is weird to have large numbers of options as a founder. That is frankly a more interesting, nuanced discussion.
1. Yep. Stock option loans are certainly not without risk. For a relatively small amount for a CEO it often makes sense. I called out that there are risks in both early exercising (or regular exercising private company stock options at all) and with company loans. Company loans should typically just be for the founder/ceo in circumstances like this -- not for the general employee base
2. Not sure where the "stupid" comment is but I 100% agree that every situation is different and not everyone should early exercise. By default people should assume their private company stock options are worthless (I have said this several times in past posts) and more like a lottery ticket. Only exercise (and pay the taxes on) what you are comfortable losing.
I extrapolated "stupid" from the title "$125M Mistake" presuming that one who made a mistake made a stupid decision.
That word was not in your post. Please accept my apology.
"Founder's $125M Choice" just didn't have the same ring to it :) But get your point.
But I included language that this could have been a choice and that these decisions are complex and a tax/financial advisor should be consulted. The post's point was to alert founders to these potential tax implications so they can be aware of them and make informed decisions. Not to say someone should exercise or not - this always has to be evaluated based on personal and company circumstances.
Appreciate the feedback
Ha! Yeah you got me on that one.
Thanks for a solid exchange