[sbf501]

One step further: Options are just a way for companies to get out of paying you a salary. (I got them from Microsoft, and from Intel before they were offered to all employees.)

Options = salary

In other words: exercise them as SOON as they vest. I had two financial planners tell me that over 15 years (I fired the first one), and both were 100% correct in hindsight.

[bmitc]

But how do you determine if (not when) you should exercise? I am trying to make this decision for a company I recently left. I don't know when they'll IPO. I know they wanted to, but the market is getting slammed, and they just announced layoffs. I don't have much confidence in the company, so I am having a hard time understanding the risk. I don't really even understand what happens if they don't ever IPO and I have purchased options.

[sbf501]

You are in a space I don't understand. (I don't even understand how/where you purchase options if it is not publicly traded and you are not an investor!)

Sorry, that's a PhD-level question, I'm still at options 101. :(

[bradstewart]

The company itself issues you the options, usually as a form of compensation because you're an employee, etc.

That option is a certificate that gives you the ability to purchase a share of the company at a specific price (the strike price). Usually when people say "buy their options" or "exercise their options", they are referring to buying the _stock_ that their options gave them the ability to purchase.

So if I join a startup, they grant me 100 options with a strike price of $0.50, and I decide to exercise them, I would write the company a check for $50 and get 100 shares of the company in exchange.

[bradstewart]

It comes down to whether or not you think the company will have a successful liquidity event.

If you think the company is going to shutdown, or sell at a lower valuation than your option's strike price, don't exercise them. Your shares will be worthless.

If you think they'll succeed and IPO or get acquired at a higher price, buy them (factoring in any potential tax implications, like AMT). It is a risk.

[indemnity]

Yep. Screw belief in the “mission”, convert it in to cash ASAP. Dollar cost averaging in away, I sold my tranches as soon as I could, every year.

Over 8 years this paid off my house in a HCOL area. Sure am glad I turned them into a real asset!

[skinnymuch]

Why did you fire the first?

[sbf501]

"Fire" is the wrong word, "stop seeing" is more accurate. Because he kept pitching his friend who sold annuities, who was one of those awkward guys that starts his pitch with 15 minutes of "this is how to invest, and 90% of americans don't .... now buy my life insurance annuities." Really didn't like that.