Your heart pounds, your palms sweat, and you wonder if you’re going to make it!? This is what it feels like for a lot of people when going through a liquidity event and determining what your post tax equity ownership is really worth.
You won’t know what it’s like until you’ve gone through it. It’s like public speaking. You can practice all you want in front of your mirror but when you get on stage in front of a live audience, it’s a completely different experience. Perhaps the speech didn’t go exactly as you wanted, but afterward you understood what it was like.
Experiences with Equity Ownership
Going through a liquidity event is exhilarating and stressful all at once. The first time you go through it, it’s a learning experience. When you signed on as an employee at your company, you probably asked for a higher salary and a lower amount of equity ownership because you needed the increased cash every pay period. Then a few years later, the company sells and you start doing the math about how much more money you could have made with a higher equity ownership stake. You vow to yourself that next time you will do a better job with your equity ownership.
If you are lucky to have a second go round, it is a bit easier to understand because you’ve been through it before. However, it won’t be exactly the same as the first time. It’s a different company, a distinct culture, and a separate leadership team. Maybe you experience more dilution. Perhaps the valuation increases a lot between funding rounds and it’s expensive for you to exercise all of your options. You prepared the best you can but you feel like you left some money on the table.
A Lucky Third Time
If you are fortunate enough to have a third chance, the third time is hopefully a charm. You get the equity you deserve given your experience, and you get a very low exercise price on your ISOs. The ISO holding requirements are sufficient and you pay the lowest taxes possible. One of your financial dreams comes true – buying a house, paying for your kids’ college education, or caring for your parents.
The third time is great for you and you feel amazing! When you worked at the first company, what if you worked with a financial professional to have the same result as the third time? Remember, most people don’t get three chances. If you started the proper way on the first go around, how much different would your life be?
What To Do About Your Equity Ownership?
You may be thinking that your company won’t be sold anytime soon due to economic conditions, so why even bother? Au contraire, now’s the time to lay the groundwork. During a down market (or an upmarket or a flat market), the best thing for you to do is to prepare. A sale of your employer can be the biggest financial windfall of your life!
Some things that you can do now are:
- As private company stock prices start to fall, exercise your options because it will be cheaper.
- Planning when you are optimistic about your company will lead you to make poor decisions about your equity. Timing is more appropriate now.
- If your company is not going to have a liquidity event, now is the time to figure everything else out about your personal finances.
Would you like to get your finances organized and create a plan so you can be confident when your company does have a liquidity event? Reach out to set up a free consultation.