What happens to my stock options when my startup gets private equity funding?

Editor’s note: A version of this question originally appeared on Reddit.‍

I work for a privately-owned tech company that has recently received private equity funding that is large enough that we will likely not need to raise funds for a long time, or possibly ever again. I have some vested stock options that I’m able to purchase.

If I buy these shares and the company doesn’t list, or they don’t get bought out, is there any value to them? Who could I possibly sell my shares to?

- Anonymous

##

Dear Anonymous,

Let’s break your question in two and explore each half. It seems like you’re asking “Should I exercise my stock options now, even though there’s an illiquid market for them?” and “What happens to my stock options if the company fails to exit?”

First, private equity firms invest in companies for various reasons. If we take an optimistic view, the private equity firm may have invested in your company because they’re confident that the company will experience an exit event soon — either that your employer will get acquired at a profit, or that it will go public.

Remember, private equity firms want to see a healthy return on their investment. There must have been something valuable the firm saw during the due diligence process to give them the confidence to invest in the startup.

The more pessimistic view (and I don’t know the details of your company’s situation or relationship with its private equity backers) is that your company could be in financial trouble and decided to bring in a PE firm to help break up its assets and sell them to the highest bidder.

Separately, you ask a good question about the value of a relatively illiquid asset like private company shares.

If you decide to exercise your stock options, I’d suggest checking with your company to see if they allow employees to list their shares on private secondary markets, or whether they plan to offer liquidity to employees, either by buying back shares or allowing employees to sell them to investors. Outside of secondary markets, tender offers and pre-IPO stock buybacks, equity liquidity typically happens during a profitable exit event — either an acquisition or an IPO.

If the company fails, or gets acquired as part of a fire sale, common shareholders (i.e. the employees) either lose their investment entirely, or have to queue up behind preferred shareholders, who get paid out first.

The decision around whether to exercise your stock options, or to wait and see what happens, is entirely up to you. It may be worth asking yourself, “Given everything I know about this company, would buying these shares at this specific price make sense?”

- Vieje Piauwasdy, Director of Equity Strategy, Secfi

Do you have a question about your stock options? Email us at ask@secfi.com