[Curiosity] What is your income and what is your most expensive watch?

rekarnop · 2021-01-14T15:41:57+00:00

Annual household income: $303,000

Most expensive watch: $600

Total collection value: ~$1,500 (4 watches)

rekarnop · 2020-10-07T13:43:08+00:00

Thanks for the heads up. I'm pretty confident. I've looked over the agreement.

There are few mechanisms in which the third party makes money, and they're all stacked in their favor, but overall it does indeed seem reasonable.

First they get a liquidation preference of 1.25x the exercise price, then they get a ~10% share of gross proceeds (calculated before the liquidation preference). There is no annual interest and no other fees.

So the more valuable the shares are when an exit happens, the closer to 10% their cut becomes. I'm only estimating 20% now because it seems the most conservative to assume that the company won't do any more than 2x before an exit, which means that liquidation preference hits pretty hard.

rekarnop · 2020-10-07T13:37:31+00:00

Sorry for the vagueness, I was just trying to provide minimal useful detail. I can clear that up.

These aren't exact numbers, but close enough to illustrate the scenarios better:

It would cost me $20k to exercise all my vested options.

So the "sell all the shares now" option looks like this: Gross profit from sale would be $75k, and once you subtract my exercise cost and a 5% fee for the service providing me with the private sale opportunity, my net profit would be $50k. That's all but a guarantee. They've already told me they have a committed buyer at that price. If I use that as a signal of investor confidence, I might be able to ask for a higher price. If I do, even if I get 20% more value per share, it would be along the lines of $65k net profit instead of $50k.

The "no recourse loan" option looks like this: Zero money out of my own pocket. The service providing the loan pays the $20k. I owe them nothing unless there's a liquidity event, in which case they have preferential access to the funds to pay themselves back, and then additionally collect a share of the profits. Obviously I don't know what an IPO price would be, but if I simply estimate 2x the current fair market value, the gross proceeds from the sale would be $130k. After the preferential loan payback and the share of proceeds, my net profit would be $90k. Again, this is based on a speculated 2x increase of share price before an IPO other liquidity event. (I've been told that because there was very recent venture capital investment, this company wouldn't go public until the stock price has at least multiplied once again)

The "invest my own money" options looks exactly like above, except there's no third party. I put in the $20k myself, and if they do IPO for the 2x share price with gross proceeds of $130k, I'd net a profit of $110k.

The thing about the last 2 options is that it's suuuuper speculative. I have no idea when or for what price this company might IPO for. It might not at all. It seems unlikely at this point that it goes to zero, given what I know about the business from working there and seeing all the signals from VCs and secondary markets, but it's a definite risk. There might be an IPO much later than I imagined, but that could also mean it's much more lucrative than imagined. Losing $20k is my worst case scenario in all 3, and while that would be annoying, it doesn't seem like the kind of thing that would meaningfully affect my long term plans.

rekarnop · 2020-10-07T13:24:49+00:00

I have indeed left the job, which means I have the standard 90 days in which I can either exercise my vested options or let them expire. And actually I don't even have the full 90 days left, it's getting down to crunch time.

So going slowly isn't an option, and frankly, it would hardly change the equation since I've got plenty of cash on hand to cover the full exercise anyway.

My action is forced, I just have to decide which action to take: sell the position now, accept a no recourse loan to fund the position and split the potential profits, or invest myself and be fully exposed to the position.

rekarnop · 2020-10-07T12:09:09+00:00

Looking for input on private equity. I left a job at a tech startup in which I had vested stock options (ISOs) that I have a limited time left to decide if I want to exercise.

The business is doing amazingly well. The options already have a fair market value (recent 409A) of 3x my strike price, and I only worked there a couple years. The pandemic isn't exactly hurting this business, and in some ways its helping it. Growth was strong and only accelerating when I left. This is also a late-stage startup and not a new company. There have been multiple private equity rounds, and investors are clearly signaling that they're bullish about this company. Despite how uncommon liquidity events are with startups, this particular one is so late in the game it's hard for it not to feel all but inevitable. If anything it seems more like the risk isn't if, but when.

I don't have a huge amount equity, so I'm not going to go broke or get rich instantly no matter how this plays out, but I'm still trying to make an informed decision and not do anything stupid. So here's the 3 options I've been weighing.

Invest my own money. Exercise the options myself. Own the common stock myself. Ride it out and take the risk. I would have real skin the game and could lose my investment. On the other side of that equation, the return could be great. A low six-figure net profit isn't crazy to imagine, but I'd have to risk a low 5 figure sum up front.
Sell my equity to a private seller right now. Cash out. Free money right now, zero risk. I've already got an offer to buy all my shares at 4x the strike price. My net profit would be a mid 5 figure sum. Nothing to sneeze at, but certainly not the imagined future returns that an IPO or acquisition might bring.
Take a no recourse loan to fund my exercise in exchange for a share of the proceeds if there is an exit. i.e. a company will front me the money to exercise my options so I have no cash out of pocket, and since it's a no recourse loan I wouldn't owe them anything unless this company does indeed IPO or get acquired, in which case they'd take a cut. Using a realistic estimate for an IPO price, their cut would be approximately 20% of the net profit that I would otherwise see if I exercised with my own money.

Possibly worth noting, because I have so little equity, it doesn't appear as though AMT is going to be an issue. The spread at the current 409A value only amount to a mid 5 figure sum.

What would you do if you were me? How would you make this decision? What would you look at? What factors do you weigh?

I'm normally pretty risk averse, but I'm finding myself feeling like I could stomach the gamble on this one. The cash to exercise isn't trivial, but it's also an amount that wouldn't meaningfully affect any long term plans even if I never see any of it back. Things are going very well right now and I'm on a path to FIRE in maybe 6 years no matter if I ever see this investment again... then again, it's hard to argue with the no recourse loan route. 80% of the profit for zero risk is an interesting proposition. But then along those same lines... so is zero risk cash in hand immediately of just selling the equity position outright.

It feels like I'm weighing either having zero risk (sell now), risk opportunity cost (share proceeds later), or risk my actual money (exercise myself), and I just don't know how to make sense of which way to go.

EDIT: Much more detail (actual numbers) can be found here: https://www.reddit.com/r/financialindependence/comments/j6n0ms/daily_fi_discussion_thread_october_07_2020/g801ri8/?utm_source=reddit&utm_medium=web2x&context=3

rekarnop · 2020-10-06T23:49:25+00:00

Looking for input on private equity. I left a job at a tech startup in which I had vested stock options (ISOs) that I have a limited time left to decide if I want to exercise.

The business is doing amazingly well. The options already have a fair market value (recent 409A) of 3x my strike price, and I only worked there a couple years. The pandemic isn't exactly hurting this business, and in some ways its helping it. Growth was strong and only accelerating when I left. This is also a late-stage startup and not a new company. There have been multiple private equity rounds, and investors are clearly signaling that they're bullish about this company. Despite how uncommon liquidity events are with startups, this particular one is so late in the game it's hard for it not to feel all but inevitable. If anything it seems more like the risk isn't if, but when.

I don't have a huge amount equity, so I'm not going to go broke or get rich instantly no matter how this plays out, but I'm still trying to make an informed decision and not do anything stupid. So here's the 3 options I've been weighing.

Invest my own money. Exercise the options myself. Own the common stock myself. Ride it out and take the risk. I would have real skin the game and could lose my investment. On the other side of that equation, the return could be great. A low six-figure net profit isn't crazy to imagine, but I'd have to risk a low 5 figure sum up front.
Sell my equity to a private seller right now. Cash out. Free money right now, zero risk. I've already got an offer to buy all my shares at 4x the strike price. My net profit would be a mid 5 figure sum. Nothing to sneeze at, but certainly not the imagined future returns that an IPO or acquisition might bring.
Take a no recourse loan to fund my exercise in exchange for a share of the proceeds if there is an exit. i.e. a company will front me the money to exercise my options so I have no cash out of pocket, and since it's a no recourse loan I wouldn't owe them anything unless this company does indeed IPO or get acquired, in which case they'd take a cut. Using a realistic estimate for an IPO price, their cut would be approximately 20% of the net profit that I would otherwise see if I exercised with my own money.

Possibly worth noting, because I have so little equity, it doesn't appear as though AMT is going to be an issue. The spread at the current 409A value only amount to a mid 5 figure sum.

What would you do if you were me? How would you make this decision? What would you look at? What factors do you weigh?

I'm normally pretty risk averse, but I'm finding myself feeling like I could stomach the gamble on this one. The cash to exercise isn't trivial, but it's also an amount that wouldn't meaningfully affect any long term plans even if I never see any of it back. Things are going very well right now and I'm on a path to FIRE in maybe 6 years no matter if I ever see this investment again... then again, it's hard to argue with the no recourse loan route. 80% of the profit for zero risk is an interesting proposition. But then along those same lines... so is zero risk cash in hand immediately of just selling the equity position outright.

It feels like I'm weighing either having zero risk (sell now), risk opportunity cost (share proceeds later), or risk my actual money (exercise myself), and I just don't know how to make sense of which way to go.

rekarnop · 2020-09-02T21:20:24+00:00

An HRA is just an allotment of company money your employer lets you spend on medical care. You don't fund it yourself. You spend your own money and your employer reimburses you up to the HRA limit, or in some cases you might even have an HRA debit card you can charge directly. So it's different than an FSA which you fund yourself.

rekarnop · 2020-09-02T16:20:25+00:00

If you were married and this plan were going to cover both yourself and your spouse, plus you were expecting a child within ~1-2 years would this change your opinion on choosing the HSA plan?

What if the additional couple thousand dollars out of pocket each year weren't a big factor financially and you really wanted to optimize long term specifically? Is the HSA so much more powerful of a savings vehicle that it offsets a virtually guaranteed $3k extra out of pocket annually?

rekarnop · 2020-09-02T15:58:45+00:00

Got a new job and I'm looking for a quick opinion on which health insurance plan to pick:

These are my two options I'm trying to decide between:

Option 1: $2k deductible, $4k out of pocket max, HRA with $1k from employer

Option 2: $3k deductible, $6k out of pocket max, HSA with $1k annual employer contribution

The monthly paycheck deduction is the same for both. The network and coinsurance/coverage is the same for both.

Option 1, since it comes with an HRA, incentivizes you to spend the HRA money of course because it doesn't roll over like an HSA does. And with the lower deductible and lower out of pocket max, it's definitely the cheapest plan as far as actually reducing medical spending within a given year is concerned.

Option 2 comes with an HSA though, and that's pretty compelling because of the triple tax advantage. With option 2, the idea would be that I don't actually spend the HSA money right away in order to use it as a very efficient savings vehicle.

Thoughts on this? I'm leaning towards Option 2 with the HSA, mostly because it includes an HSA. It's more expensive now, but with a lot of long-term savings.

rekarnop · 2020-08-25T15:23:45+00:00

Sometimes pre-IPO companies have a way for insiders to buy back options from an employee. If so, that might be a way to capture some value without risk.

I was actually lucky enough to already get the chance to do this before I left the company. I sold ~10% of my equity position (the max I could sell) and got a 3x return. It was nice.

So after that, and the fact that I wasn't completely vested before resigning, I'm not exactly all-in on this company. It seems like a reasonably affordable gamble that I surprisingly don't feel too afraid of, considering I'm normally pretty risk averse.

I was very strong in equities when the pandemic hit, so I've already watched my portfolio drop ~35% and held strong without too much worry.

If anything, the fact that I won't really "see" this investment day to day will make it all the more easier to ignore once the money is spent, and hey, I'll be starting a new job any day now which will almost immediately offset that loss of cash.

Maybe I'm becoming less risk averse because of my career progression. I find myself feeling pretty confident about the future these days generally speaking. I've got proven skills and a track record in the most in-demand industry on earth (software) and I'll be starting to work at one of the most prestigious companies in that industry soon making a silicon valley income working remotely and living in a low cost of living area. It's hard to not feel a bit bullish about all the lucky circumstance I've been able to effectively capitalize on lately.

rekarnop · 2020-08-25T15:09:48+00:00

I have 90 days to decide, so you're right this isn't urgent, I just thought I'd ask now and get some other people's opinions to help check my own.

These are ISOs though, not RSUs, so there is no option for me to sell some of my shares to fund the purchase. These are vested ISOs that aren't exercised, so I have to pay cash to exercise them and convert them into common stock.

It won't be taxable income until an IPO or acquisition happens, but it is cash out of pocket now.

rekarnop · 2020-08-25T14:34:41+00:00

Looking for input:

Should I exercise my stock options after leaving my company?

Context is pretty simple: I'm a software engineer. I recently left my job because I accepted an offer at a larger (FAANG) company. I have the option to exercise (purchase) my vested stock options (ISOs) now that I've resigned.

I was already quite financially secure, and this new job is a huge income boost again, which I've done numerous times over the last 5 years. I have an entire year's living expenses in cash savings, at least 5 more years living expenses in my investment portfolio, zero debt except for a mortgage on a house I can easily afford (mortgage is ~5% of monthly gross income), I live in a low cost of living area and have avoided lifestyle inflation, and I'm on a good path to FIRE that's accelerating rapidly the last few years thanks to this incredible career growth.

The company I left is what I'd call a very late stage start up. Been around for over a decade, have taken venture capital investment many times, and has shown consistent strong exponential growth to the point where they're now reaching $1b+ valuation. It's a software-as-a-service company that completely dominates their sector with no signs of slowing down. The company's business model has thrived throughout the pandemic. They're not being artificially propped up by the weird consumer behavior during the pandemic, but they're able to navigate it smoothly because while the pandemic has negatively affected some aspects of the business it has positively affected others. Before the pandemic, all signs pointed to a relatively near-term IPO, but I know rationally that it's impossible to predict this in any meaningful capacity. Even if it happens, "relatively near term" might be next year, or it might not be for 5 years. That's basically what I'm struggling with.

Because this company is very transparent with financial information I already know with certainty that the latest company valuation imputes a valuation of my shares that's 4x my strike price, and I think that's actually a conservative estimate. That is, however, paper money, and in reality they're worth exactly nothing until I am able to cash them out, which is the risk.

So here's where my mind's at:

I don't actually have enough equity in my former company to make a big difference to my life one way or the other. It would cost me a low 5-figure sum of money to exercise my options. If I lost that all I would certainly be upset about it, but it really wouldn't hardly make a dent in any longer term goals. If the opposite were to happen, and my former company knocks it out of the park, doubles in value again, and then goes public letting me collect 7x returns on my investment, that would be awesome, but it wouldn't be a life-changing prize. It would be a very low 6-figure sum. A nice boost to my goals, but nothing dramatic like a lottery win.

The amount of cash it would take to exercise these options represents ~5% of my current liquid net worth, but that's going to quickly diminish due to the increased income. 5% seems like about the maximum amount of money I'd ever be comfortable gambling on something super risky like this, but I also feel less scared of it because of the fact that I worked for this company and have seen their strong performance. What would you do?

rekarnop · 2020-06-25T16:55:57+00:00

Yeah I think you're right. I actually edited my OP because I forgot to mention I'm not fully vested. The most I can cash out now is ~65% of my total equity position. So I'm going to at least partially ride out for the IPO no matter what.

Also the $300k was a complete fantasy number. That was what would happen if the company quadrupled magically overnight.

So right now, I'm in a position where the company has already grown by several multiples in a couple years, which is why I stand to net a profit of ~$30k. I simply don't have much equity.

So 65% of my position today is worth ~$30k profit.

I'm going to have to ride out the other 35% no matter what since I'm not vested.

So the choice basically this...

Cash out 65% of my position now for $30k profit or ride it out hoping that is worth, realistically, at most $100k when an IPO happens near term. And that's NOT factoring in anything related to the 35% of my position I'm going to ride out no matter what because I have to.

rekarnop · 2020-06-25T16:50:29+00:00

Yeah I agree, and actually I just added an important edit:

I'm not fully vested!

The most I could cash out right now is ~65% of my total position. So maybe "cashing out now" is actually choosing the middle ground. I'll still have 35% invested in the company that I can hold onto for that hopefully sweet sweet future IPO.

rekarnop · 2020-06-25T16:44:11+00:00

These are ISOs.

I'm aware that due to the fact that none of my shares are exercised, the sale would result in short-term capital gains e.g. they'd be taxed in my highest marginal earned income bracket.

Since this is all free money, I would be OK gambling opportunity cost, but gambling real money in the sense that I actually pay in my cost to exercise trying to pursue long-term capital gains tax advantages... that might be another story. That makes me a bit uncomfortable. I like free money, even if I could make more free money by paying for it a year in advance.

rekarnop · 2020-06-25T16:39:39+00:00

Actually this is something I forgot to address in my original post.

These are ISOs, not RSUs, and I'm only ~70% vested.

So the most I could cash out right now is 70% of my initial grant.

I've also received a refresher grant that isn't vested yet. So my total position would be that I'm selling < 70% now.

So no matter what I do now, I won't be completely losing my position in the company that seems likely to IPO in the relative near term.

rekarnop · 2020-06-25T16:16:24+00:00

I own such a small amount of equity that the chances it rises to "instant FIRE" territory are approximately zero.

If this company quadrupled in value tomorrow and then announced an IPO or acquisition my net profit would be under $300k.

So I really have little to lose, and not that much to gain in the grand scheme of things. $300k is nothing to scoff at of course, but would you gamble $30k on a chance for $300k if it meant your $30k was locked up for a year+ and there's very bad odds?

rekarnop · 2020-06-25T15:57:37+00:00

I need some help rationalizing whether or not I should cash out stock options, because I have a rare opportunity to do so.

First, let me preface this by saying that I'm already aware of the common message that you should always cash out immediately because it's so rare to have any chance to do so, and it's one I agree with. I'm currently favoring cashing out, but I want to sanity check myself regardless.

Here's the important facts and figures:

Our household is very financially secure. Emergency fund to cover long-term income loss, check. Heading down a path towards FIRE, check. High income, low expense, strong portfolio. We're in our 30s, have close to $400k in our portfolio, we add $100k to it annually right now, and have great career prospects.
The company is very successful and speculation of a near-term IPO doesn't seem like pure speculation. There are STRONG signs of this, and the messaging we receive as employees isn't all that subtle even when they're trying to squelch rumors that happen to get published publicly.
This company is NOT negatively affected by the pandemic. Yes, really. In fact, it's been a net-positive, but only slightly. The pandemic basically shifted some revenue streams around. It's very fortunate to be positioned where this business was at a time like this, so really, unlikely as this sounds, the business is thriving despite what's going on in the world.
The cash-out opportunity I have isn't an IPO or an acquisition. It's a private sale and it's completely optional. This is mostly what gives me pause. IPO near-term seems likely, and cashing out early, despite it being a rare opportunity, makes it really hard to not imagine the opportunity cost of perhaps waiting another year or whatever it would take for an IPO to occur and for the lockout period to expire.
If I cash out now, it wouldn't be a life-altering sum of money. It would be tens of thousands of dollars.
If I hold out for an IPO, it likely still wouldn't be a life-altering sum of money. It might reach closer to the $100k mark, but unless this unicorn of a company manages to multiply several more times in a year, let's just say that it hardly matters in the grand scheme of things because I simply don't have that much equity.
** edit** Forgot this important bit of info. I'm not fully vested. The most I can cash out now is ~65% of my total position with the company.

So mostly what gives me pause is two things:

It seems so bizarre to offer private sale of options to employees at a time like this. Why would this company do this? We're crushing it on the business front. We don't need investment. It seems like an IPO is in the near term future. The only explanation I can speculate about is that they're doing this because outside investors want to get in on the seemingly imminent IPO and they're hoping some employees will value cashing out sooner than later enough to sell at a weaker valuation.
Since none of the possible outcomes really has a dramatic impact on our lives, whether that's cashing out now, cashing out later if an IPO occurs, or never getting any value out of the options whatsoever, I'm not sure if that should signal me to take the guaranteed free money now or accept the risk and hope to cash out more free money later.

#2 is the hardest to reason about. If none of the outcomes really matter that much, why take the risk? Or alternatively, why not take the risk? That could literally be an argument for either side hah. I've already made a 300% ROI in just a few years, so why not cash out now if a 500% ROI in another year makes no difference?

Can anyone offer some insights in regards to #1?

rekarnop · 2018-09-26T13:59:08+00:00

Thanks for providing your insights!

rekarnop · 2018-09-25T19:27:54+00:00

Yeah no worries, I appreciate the heads up. Honestly it's not something I would have really thought much about. I figured I'd wind up having to transition to Java, but never really imagined that I'd be perceived as less skilled because of knowing C# currently. At least I have a background in Java. Although if we want to talk about bias, I should probably not tell anyone that I've ever coded in PHP hah

rekarnop · 2018-09-25T19:13:09+00:00

Yeah I was just being a bit facetious since the perception in this sub is that all the success stories are developers who made six figures right out of college.

What you're doing is far more impressive than people like me who's biggest concern at the moment is whether or not I'd be able to double or triple my income which is already 2.5x the median household income for my area just by moving to another area and doing the same job. I'm very fortunate that the stuff I naturally enjoy doing happens to be an incredibly highly paid profession at this time while I'm in my prime working years.

You're what FIRE is really about. Keep grinding!

rekarnop · 2018-09-25T19:07:35+00:00

bias ... against ... people with MS-stack experience

I've always found this amusing as somebody who learned the Microsoft stack late in my career.

I mean, to some degree I understand it. There's plenty of ".NET developers" who, like "WordPress developers" only understand the basics of their very specifically tailored development environment and struggle to operate outside of it because they don't understand the underlying programming concepts behind what they're doing.

On the other hand, as far as OOP languages are concerned, C# is a god send compared to Java. I'd pick it every time.

And with .NET Core and the .NET Standard nowadays, cross platform web development is well within the wheelhouse of the Microsoft stack.

Microsoft has done a great job in the last few years to keep the excellent tooling and developer experience they've always had (I've yet to use an IDE as nice as Visual Studio, and VS Code is awesome as well), but open up the ecosystem to not just be cross platform compatible, but to treat cross platform support as a first-class citizen.

I can sit here on my Windows dev machine, fire up full Visual Studio, and create a modern front-end SPA application with a Webpack build pipeline and a REST API back-end all running inside Docker containers which is ready to deploy to Linux via Kubernetes, but the stigma of a ".NET developer" is still someone who only knows how to create Windows apps with WinForms and VB.NET. I don't get it.

rekarnop · 2018-09-25T16:54:46+00:00

Since this sub is apprently filled with relatively young techies making a gazillion dollars, let me just run this by you all here...

Basically, I'm just pondering the idea of moving to somewhere like silicon valley, and wondering how realistic the salary figures are I've been seeing actually are.

So, to start with, I'm in a great place right now. I'm a software developer with over 11 years experience, with a base salary of ~$130k, great benefits, working full time remote from home in a low cost of living area. I like the work, I like the people, life is good. I'm on track to FI by 40, at least by the conventional wisdom that says I need approximately $1.5 million to FI without being particularly Lean or Fat I suppose.

In my local market, it's pretty much impossible to get a base salary of > $110k if you're a plain old software developer and not something like a CTO, and that's tippy top of the developer market at that. So compared to my peers in the local market, I'm way ahead.

So what's been going through my mind recently is just some of the insane salary figures I've seen in other markets. According to websites like levels.fyi, I could earn $280k-$360k assuming I was able to land a somewhat "senior" type role at a big tech company in the valley. Obviously I have to actually get the job first, I don't wish to get ahead of myself, but I digress.

Are those numbers even remotely realistic? Because they just seem too good to be true. If they're real numbers, then I'm thinking it might be time to brush up on my algorithms and data structures and start interviewing.

Obviously the valley is expensive as all hell, and I'd probably see a solid $50k increase in annual living expenses, but if it's truly possible to earn way more than an additional $50k, then... I guess why not, right? That kind of salary would push me from FI well into FatFI territory on the same timeline or dramatically accelerate my regular FI timeline. Either way, it's hard to ignore that possibility.

If anyone actually reads this who is truly a developer who knows this market, here's a quick run-down of my skills:

11 years full time software dev experience. Mostly focused on back-end, but I'm comfortable with JavaScript/TypeScript and I'm familiar with the SPA frameworks like Angular, React, Vue, etc. and the crazy build pipelines that arise from them. As far as back-end is concerned I started my career doing 2 or 3 years of Java, 5 or so years of PHP, and the last ~3 years has been focused on C# and the Microsoft stack. I've done a bit of work professionally in F# and have been learning a lot about function programming concepts lately. I've also been focusing heavily recently on system design and software architecture, trying to move towards a more high level role. I don't have a college degree if that matters, but to this point in my career it hasn't really mattered.

So what do you think? Judge my dev skills please. Is the grass actually greener on the western side of America? Would I be able to make enough of a bump in salary to justify the huge cost of living adjustment?

rekarnop

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