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When Should You Not Exercise Your Options?

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Michael Wenner   June 26, 2019

This guest post was written by our friends at Harness Wealth. See below for more info.

Stock options - the right, but not the obligation, to buy stock in a company at a fixed price - are ubiquitous in the startup world. Companies typically grant stock options as a form of compensation and as a way to make sure employees have skin in the game.



In many cases, stock options are valuable because they allow employees to acquire equity in a company at a lower price than a previous financing round. In hit cases like Google, Amazon, or Zoom, employees were able to acquire shares and see a big pay day. There are situations, though, where not exercising stock options may make sense for an individual. Primarily, as the name implies, stock options give employees optionality, and unless the options are expiring, it may be prudent to hold off on exercising to maximize value and reduce risk. Below are some situations that demonstrate the value of not exercising options.

1) When you can’t afford to exercise your options


Exercising stock options costs money, albeit at a price point potentially lower than a future equity raise or public offering price. If you can’t afford to buy the shares, it may be best to hold off. Borrowing money—in other words, leveraging your assets—can significantly increase the cost and the risks of exercising your options. In the event the value of your company’s shares decreases, you will still be contractually obligated to pay the loan interest and loan principal. If you’re unable to, you may be required to forfeit the shares to the loan holder or liquidate other assets to repay the loan.

Additionally, there are a number of tax implications regarding exercising options. For a deeper dive into the potential tax implications of exercising stock options, check out Tax Reform: What it Means for Your Startup Equity (Part I) and (Part II).

2) Limitations on selling shares post-exercise 


Companies have different policies regarding equity ownership for employees and non-employees. Oftentimes, employees have strict restrictions on the sale of their equity, either requiring them to hold the shares for a certain period before they’re eligible to sell or only allowing the sale of part of their equity.

Prior to exercising options, inquire about your company’s policies regarding the sale of equity. If you exercise your options and aren’t allowed to sell enough to at least cover the purchase price, commissions and fees, you’re taking on a risk. You’ll be stuck with the stock, which could decline, and your investment could lose substantial value.

3) The importance of portfolio diversification 


Portfolio diversification is an important strategy that aims to minimize risk and maximize returns by balancing the various risk profiles of various investments. Purchasing equity in a startup through stock options is one part of your investment portfolio, and, as a result, you should balance your portfolio accordingly.  You don’t want the success of your entire portfolio to depend upon your company doing well. If you exercise your options and don’t sell your stock immediately, you could end up with your whole portfolio riding on the stock price going up.  If things go poorly, this could mean you end up out of a job and your investments tank at the same time– which is hardly a good position to be in.

You can avoid this by selling at least some of the shares you exercise right away – but only if you’re allowed to do so and can afford to sell and make enough of a profit to pay any capital gains taxes and other taxes you’ll owe.

As such, your risk appetite and desired portfolio diversification may warrant holding off on exercising options granted by your startup.

4) Stock option and equity value is dependent on the success of the company 


It’s important to keep in mind that the value of stock options and equity are wholly dependent on the success of the startup. As noted above, in ultra success stories like Google and Amazon, employees were handsomely rewarded for buying into the company. In reality, not all startups are Cinderella stories. By exercising stock options, you are betting on the company having a successful exit, either through an IPO or acquisition, but in the case where the company folds, the equity value goes to zero along with your investment. As a result, it can be prudent to wait until the startup has proven itself and has a clear path to an exit.

This is also dependent on your ability to sell your stock shares after exercising. If you can’t, and you think the price of shares will fall, it would make no sense to exercise your options and pay a lot of money for an investment you believe will lose value.

5) Talk to a Financial or Tax Advisor


Consult with a financial and/or tax advisor to discuss the best course of action regarding your stock options. A financial advisor can help you understand the risks and benefits of exercising stock options in the context of your financial situation, risk profile, and long-term plans. Additionally, a tax advisor can help you understand the tax implications regarding your financial decisions.


This post was sponsored by Harness Wealth. Harness Wealth is dedicated to helping clients unlock financial opportunity to achieve their best financial future through a holistic and personalized approach. They provide a unified data platform that enables clients to manage their financial picture. Harness then pairs clients with a highly curated set of top tax, financial and legal advisers, and power those ongoing relationship with their proprietary technology.






Note: EquityZen is not tax or financial advisors or professionals. Please consult financial and tax professionals prior to making any investment decisions, including whether to exercise options.

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Battle Royale: Workplace Chat Apps (Slack vs. Microsoft vs. Facebook vs. Google)

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Michael Wenner   June 18, 2019

From a “Tiny Speck” to Workplace Chat Domination 

Before its meteoric rise to unicorn status, Slack humbly began as an internal chat tool for the company's - then called Tiny Speck - main product, a browser-based game called Glitch. In the throes of cracking the MMORPG landscape, the Tiny Speck team created an internal chat tool to facilitate game development. When the founders realized that the underlying game software was on the way out, they re-assessed and found that their internal chat tool was the best path forward, subsequently rebranding to Slack.

Slack by the Numbers

Slack unveiled the numbers behind its platform on April 26, 2019 when it filed its direct listing paperwork. The company boasts over 10 million daily active users in over 150 countries. Additionally over 600,000 companies use Slack, though only 88,000 are paid subscribers. The company reached ~$400M in revenue in FY2019, growing 82% year over year, but has continued to generate ~$140M in yearly losses since 2017.

Slack vaulted to these numbers by billing itself as a collaboration tool, bringing together all the various communication tools under its platform in an aim to increase productivity. Based on a Slack survey from 2015, users reported almost 50% reduction in email usage, 24% reduction in meetings and an increase of productivity around 33%.

Conversely, Slack’s platform has met criticism for an environment where employees are inundated with messages in various groups and chats, which can ultimately reduce productivity. While the jury may be out, there is no questioning that Slack has changed how employees communicate.

Chat App Battle Royale (WORK vs. MSFT vs. FB vs. GOOGL)

Atlassian's HipChat (RIP)

With any hit application come copycats, and tech giants have entered the market to capture a piece of the pie. Slack originally competed against Atlassian - known for its issue tracking application, Jira, and team collaboration product, Confluence. Atlassian offered HipChat, but it failed to gain traction among users, despite Atlassian’s well established name in the software industry.

In 2018, Atlassian decided to sell HipChat’s intellectual property to Slack and collaborate rather than compete. As HipChat sailed into the sunset, other companies joined in the fray. Google, Microsoft and Facebook offer competing products through their enterprise solutions.

Microsoft Teams

Microsoft offers Microsoft Teams as a part of its enterprise Office 365 subscription. Upon launch, Microsoft boasted over 500,000 users. Microsoft has been able to convince enterprise customers to adopt Teams, since it’s a free add-on to premium business subscribers. As a result, Microsoft has reduced a large barrier to adoption.

Facebook Workplace

Slack additionally competes against Facebook after the company released Facebook Workplace in October 2016. Facebook marketed Workplace with eyes on Slack, calling it a “work collaboration tool.” Workplace’s genesis, surprisingly, parallels Slack’s, as it was originally created as an internal collaboration tool to reduce the reliance on emails. Workplace is notably different from Slack as it more closely mirrors Facebook’s layout, using news feeds and user “walls.”

Google G-Suite

Lastly, Slack competes against Google through Hangouts Chat and Meet. Google sells collaboration and workplace tools through Google G-Suite, much like Microsoft’s Office 365 product suite. Google has co-opted Microsoft’s strategy and offers Hangouts Chat and Meet as a free add-on to G-Suite subscribers.

What's Next for Slack?

Slack faces stiff competition as it battles against three tech giants offering substantially similar products. Slack will need to continue to provide integrations and functionalities that make Facebook Workplace, Microsoft Teams, and Google Hangouts Chat and Meet pale in comparison.

Finally, Slack will need to convince enterprise customers that the added functionality warrants a paid subscription outside of their current workflow tools. Through its S-1 filing, Slack has shown that it is focused on acquiring customers, and as the company enters the public markets, investors will focus on Slack’s total user growth and paid subscribers.

Slack IPO Date and Info

Slack IPO Date: Thursday, June 20, 2019.
How to Invest in Slack Stock: Like Spotify, Slack will list directly on the NYSE.
Slack IPO Price: Slack shares have traded as high as $31.50 in the private market.
Slack IPO Center: Visit Our Slack IPO Center for our full Slack S-1 Review.
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The IPO engine has sputtered back to life, but who's going public? A look at the companies that have publicly listed so far in 2019

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Risun Udawatta   June 13, 2019

 



2019 has been an eventful year for initial public offerings (IPO). For almost two decades, the market has experienced a drought of tech IPOs, during which companies have chosen to stay private for much longer than in the past. However, with this year nearly halfway over, eight high-profile tech companies have already gone public in one of the most anticipated IPO seasons in the last several years. Despite the mixed bag of post-IPO trading performance, more highly valued startups are expected to publicly list later this year.


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