For employee shareholders, exercising options or selling shares is something many consider, especially when there is a personal need for liquidity (such as buying a home or funding education) or a desire to diversify assets.
Culled from conversations with thousands of employee shareholders who have considered liquidity, here are answers to some of the most common questions:
What are my options for liquidity?
Over the past decade, companies have delayed liquidity events which left many shareholders exploring alternative routes to partial or full liquidity. More shareholders seeking liquidity has been coupled with the maturing of the secondary market for private market assets. This has streamlined the selling process for many investors.
EquityZen CEO, Atish Davda, recently published an article on the investor opportunity in the private markets, stating “the volatility in the public markets is creating a unique opportunity for private market investors. We expect top-tier, IPO-track companies to continually defer their coming out parties, both raising capital and growing privately.” With buyers in the market, this opens the doors for employee shareholders to turn their sweat equity into liquidity and realize this part of their compensation on their terms.
What should I consider if I've been laid off?
For those facing layoffs, liquidity becomes increasingly important. Many employees have a 30-day window post-termination to exercise their options before they expire. While some companies are extending this window, it still means that employees seeking liquidity to finance their option exercise need to move quickly. EquityZen is here to help those employees understand their option exercise timelines and guide them through a liquidity transaction if and when it makes sense.
How can I get started?
As a first step, check your stock option agreement for details on your options: the type of shares, number of shares, vesting requirements and strike price. You will also want to take note of how long you have to exercise your options.
Rather than solely evaluating the relationship between the share price and potential exit price, also consider the percentage growth from the strike price.
A strike price is the fixed price you will pay for one share of stock. You can think of the share price as the price at which a sale happens. The “spread” is the difference between the strike price and the share price when you exercise. This difference translates to your potential gain. For example, say your strike price is $1 and the share price is $10. The spread would come out to $9 (10-1= 9).
Next, review your net worth and your portfolio. Ask yourself: How much is my net worth on paper tied to my company’s equity options? Do I need to diversify my portfolio further?
Startup employees do not always take advantage of their options which are bundled into compensation packages. You are allowed to ask your employer for more clarity about your options. Also, if you have limited access to cash, you can also explore a cashless exercise.
Finally, once you have details on your shares, we encourage you to register your equity on our EquityZen to explore a sale, explore our other blog posts, or reach out to firstname.lastname@example.org to learn more.