Investment firm offering to buy shares - should I bite?
A privately-funded start up I was at went through a series B early last year. The investment group got a board seat as part of the deal. That same group made an offer to buy up to ~1/2 of the common shares - creating a nice opportunity for liquidity after many years. Two things about the offer make me uneasy though. Unfortunately I'm guessing they're standard. 1) Offer is for 20% less per share than the valuation from the funding round, despite good growth and performance over the last year. 2) The firm "may have knowledge known only to the board" (since they have a seat). Both items are clearly called out in the sale contract. The second in BIG BOLD SCARY LETTERS, and re-mentioned twice in the "FAQs". It's a good amount on the table - several hundred thousand dollars. Yet, it seems totally feasible, completely sleazy, and *completely legal given the contract* that they have knowledge of or plan to push for a sale soon. To me, as a high-grown investment firm they would not be offering to buy shares unless they were planning on being able make a good return. I don't need the money, yet by not taking the opportunity I remain at the mercy of the directors of company into which I no longer have any real insight. So, ex-startupers, should I accept the offer? What questions should I be asking - of myself or the offer?
The question to ask is do you need the money? And if you don’t need it urgently, then can you invest it to get better than 10% returns? If your amasser is no to both the questions, keep in mind that the Investment firm is buying your stock at 80% of valuation, that’s a pretty sweet return for them. Also there is a reason why they want majority stake in a growing company, esp after they joined the board and got exposed to valuation and accounting metrics.
Yup, fear of missing out IF things go big(ger), but as other's pointed out - they have diversification that I currently don't.
Let’s say you do decide to diversify. Can you find a better return than your current company? Also I am guessing you do have a 401K that you are investing in up to the limit.
Great deal! Typical value of startup equity is zero. Second the "sell half, keep half" suggestion ^^
Agree. Hedge your bets.
If you have hundreds of thousands of dollars in one startup, you are really not diversified. Even if you don’t “need the money”, you still stand to lose all of it by not selling now. I would at least partially sell.
Good perspective. It is a very recent unbalance and probably won't feel real till it hits my bank account.
accept it. keep in mind 20% discount is from the preferred price. it’s probably still a premium vs the 409a valuation
Anybody also curious about the tax implications in this case? Scenarios: OP holds RS, ISO, RSU etc
Don’t let the tail wag the horse.
As I understand it any sale will basically count as income, taxed at a long term growth rate since I executed my options so long ago - pushing me into a higher tax bracket for this year if I sold.
Sell it all. Money in hands is better than more money maby later
What are the chances the share price will increase over next 1-2yrs? If it does increase, how much would it increase by? So, if there’s 80% chance the price stays same, selling is a good deal. Your expected value is 80% in the future, so 80% in present is better... If theres a 50% chance it doubles and 25% stays same & 25% goes belly up, your expected value is .5 * 200% + .25 * 0 + .5 * 100% your expected value is 150% of current value... Just estimate the percentages above and calculate your expected value... otherwise, you’re flat out gambling
How long ago did you exercise? Are they purchasing stock, or are they purchasing your unexercised options? If hundreds of thousands are on the table, go to a CPA and get personalised forecasts for either scenario. If you paid AMT when you exercised, pay special care to how this transaction would affect your AMT taxable income -- if the AMT-calculated basis is larger than ($SALARY - $AMT_DEDUCTION), you risk leaving a lot on the table as AMT credit (effectively a 0% loan to the IRS) that may take decades to recover.
They have a diversified risk outcome. If it doesn’t work out, they are fine. Do the same for yourself. Sell half and keep half. You minimize regret whichever way it goes. (Do it for each subsequent round if you get the option).
Note: not an ex startup-er; so take with a pinch of salt.
Yes. Do what Pinterest says.