[patio11]

It's difficult for many entrepreneurs to hedge, particularly young or first-time entrepreneurs, because a supermajority of their net worth is in their company. If you own a software company and have $10k in your IRA there is no option available which causes that IRA to suddenly be worth an appreciable portion of the value of the software company given some event which severely compromises the worth of the software company.

The best option available if you're concerned about sector-specific or firm-specific risk is to decrease your exposure to your own company. For example, if your company has already created tangible economic value, you'd do something like a secondary sale while raising a new equity round, such that part of the round goes into your pocket rather than the company's coffers. You'd then take that money and then do anything other than putting it into a high-growth tech company.

This is becoming much more common than it used to be, to my understanding. Historically VCs preferred to have founders be "hungry for an exit" (which was, ahem, so that VCs would have a superior negotiating position), but these days social acceptability of cashouts is increasing as a) the market favors entrepreneurs and b) VCs are starting to cotton onto the fact that early acquisition offers (which murder VC returns) are radically more attractive when you have $600 in your checking account than when you can comfortably contemplate e.g. a wedding, childbirth, or a home purchase (well, OK, maybe not a home purchase in the current real estate market) without suffering crippling amounts of financial anxiety.

Given that one has a non-trivial portion of their net worth outside the company, there exist options for hedging, but given that you're probably better at selling software than on financial alchemy you should probably stick with what you're good at.

That said, you might do something like I did, which was e.g. pick a publicly traded company which would get shellacked if your sector got hit and buy deeply out-of-the-money puts on them. (I picked Salesforce and spent ~$500 on an options position which pays out only if they either have Enron-sized accounting issues or SaaS gets punched in the face. It expired valueless. I'd have re-upped it for another year but didn't anticipate my net worth and professional career to both be 90%+ SaaS-weighted for most of this year.)

[7Figures2Commas]

> That said, you might do something like I did, which was e.g. pick a publicly traded company which would get shellacked if your sector got hit and buy deeply out-of-the-money puts on them. (I picked Salesforce and spent ~$500 on an options position which pays out only if they either have Enron-sized accounting issues or SaaS gets punched in the face. It expired valueless. I'd have re-upped it for another year but didn't anticipate my net worth and professional career to both be 90%+ SaaS-weighted for most of this year.)

This is not good advice. Buying options is a fool's game. The vast majority of retail options buyers lose money, which isn't surprising given that upwards of 70% of call and put options expire worthless. When it comes to losing money, buying deep OTM options is by far the best strategy.

If you want to play the options game, you are statistically far more likely to not lose money, and to make it, by selling options.

[patio11]

That's the point of an insurance policy: you want to say next year "Darn, I spent a small predictable amount of money and nothing bad happened so I got nothing for that money."

The more pertinent criticism of this strategy would be "Patrick, there are all sorts of ways for the value of your company to go to zero, including in the middle of a sectoral decline, without causing the options you purchased to be worth enough to meaningfully cushion the blow."

[7Figures2Commas]

A protective put against an equity position can function like an insurance policy. For example, if you owned a large position in CRM stock and were sitting on significant unrealized gains but didn't want to sell, you could buy CRM puts to protect your equity position. Of course, there are other strategies (like a collar) that are probably going to make more sense in many scenarios.

Buying a deep OTM put in a single company as an "insurance policy" for your privately-owned SaaS business is patently silly. The correlation, if any, is far too weak to be meaningful but even if you believed there was some correlation, to follow your own criticism of your strategy, I find it hard to believe that $500 worth of puts would provide protection unless you have a tiny business. Even if the value of your puts grew by, say, 3900%, an entirely unlikely scenario, your dollar gains would still only be $19,500.

So I'll repeat: folks should not consider buying puts (and deep OTM puts at that) as you suggested.

[gadders]

Back during the first dot-com boom I was working for a Swiss Bank and they were marketing something called "Proxy Hedges" to entrepreneurs. The idea was that if your start-up was, say, a tech company, you would buy shares in companies that were in an industry that tended to do well when tech industries didn't. No idea what. Maybe supermarkets or mining something .

[treblig]

You'd then take that money and then do anything other than putting it into a high-growth tech company.

Yep, that's one way to hedge :)

I guess the main thing I was getting at is - is there any high-growth tech company that you could start that has more opportunity in a bubble burst?

[adventured]

All good tech start-ups benefit more from a bubble bursting, than from the roaring times during the bubble.

Others have written about this before; in fact every time this happens it gets historically summarized by someone. If you look at the numerous boom / bust periods in tech, whether the '80s, '90s, or '00s, the best tech companies roared right through the downturn and came out the other side in great shape.

It's the same reason Intel always believed in investing right through the bust periods, to gain ground against everyone else that either can't do that or is foolish enough to go into lock-down mode.