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Comment by mmastrac | Hacker News Reader

I obviously don't want to give financial advice, but every time I've traded cash for stock in comp it's worked out for me in spades in the long run. This doesn't happen for everyone, it might not happen for you, but it's been very good to me on three separate occasions.

Just remember that it's terribly illiquid and you're going to doubt your decision, potentially up to a decade later.

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If you did this at any time in the last 10 years you were probably rewarded handsomely. However the macro environment has significantly changed and I don't think your past behavior would be predictive of future performance.

For the tech sector it's really been more like the last 22 years. There hasn't been an extended downturn in US tech stock since the original dot-com bubble. The 2008 recession ended up being a 1-2 year blip. The COVID contraction was extremely brief. By comparison, if you invested in the NASDAQ in 1999/2000, you'd need to wait 12-14 years to break even.

I don't have a crystal ball, of course, but to me things are looking a lot closer to 2000 than 2008.

But did the bubble already burst in tech? Valuations are very low right now. I don't think we're necessarily at the bottom yet, but I think the worst has already come to pass.

Nobody can predict the bottom, or how low things will go.

But I disagree that valuations are very low. Frankly, many tech companies (Uber, Twitter, etc) are still unprofitable money-losing machines with high valuations because of their potential growth and expectations of future profitability. There's an argument these companies should be worth much, much less.

For the past ~10 years in particular, investors haven't cared about profitability; a market downturn may change that.

Also, as the recession or depression continues, advertising is going to get scaled back and may destroy ad-tech companies like Alphabet/Google and Facebook.

Your prediction is as good as mine, of course. But I'm a bear, expecting a river of blood to flow through the streets of Silicon Valley.

I agree with your general assessment of the economy, but those are all factors everyone knows.

The adjustment we saw earlier this year was going from “the economy is booming and interest rates will be 0 forever” to “interest rates are going to 4% and we’re going to have a recession.” That’s an absolutely massive adjustment in expectations and stock prices, especially of high growth tech companies, reflect that adjustment.

In order for valuations to drop substantially further, a similar expectation adjustment would need to happen. Something like “I thought we were going to have a recession but now it’s worse than the Great Depression”. Simply adjusting expectations from “minor recession” to “moderate recession” isn’t big enough to crater the markets like we saw earlier this year.

> Valuations are very low right now.

Very low compared to what?

In the specific case of Shopify, stock value is 20% of what it was a year ago, and 80% of what it was a month ago. Isn't that what's relevant?

Shopify's explosive stock growth always struck me as kind of scammy - or to be more charitable, the results of a very well targeted marketing campaign. It's back to where it should be - along the way, VTEX and BigCommerce jumped on the IPO train at exactly the wrong time. Everyone was sniffing their own farts in that sector for the last two years. Glad to see it come back down to earth.

Not when the discussion in this sub-thread was about the "tech sector". (And it's not obvious if the valuation of Shopify is "very low".)

Lots left to go down. Think of the global events right now - all we need is one or two more destabilizing events and we're in a bigger heap than we are currently.

The bubble may have burst but doesn't mean you've bottomed. Still haven't seen many companies go belly up or VC fund shutdown. All we've seen is valuations drop and some layoff but not big layoffs and also the valuation dropped from their spectacular highs so its all relative.

Companies that lose money have gone from trading at a multiple of infinity to earnings, all the way down to a multiple of infinity on earnings...

Look at how a lot of valuations dropped during dot-bomb. 50% is nothing.

I agree with your point, however there has been plenty of 70-80% (or worse) destruction as well.

Fiverr -88%, Fastly -92%, Pinterest -72%, Zoom -87%, Shopify -82%, Roku -85%, DocuSign -82%, Twilio -84%, Virgin Galactic -91%, DraftKings -75%, Palantir -82%, Coinbase -80%, Robinhood -88%, Rivian -78%, Roblox -72%, Unity -83%, Nikola -94%, Peloton -94%, Snap -86%, Square/Block -73%, Zillow -84%, Teladoc -90%, UiPath -84%, Affirm -83%, SoFi -75%, DigitalOcean -70%, Asana -83%, Okta -80%

That's in the realm of a dotcom bubble style implosion. There are plenty of other prominent names to add to that list. Having lived through the dotcom destruction, this rhymes, even if it's not exactly the same.

Very true. But the crazy thing is, in the opinion of many people, these companies were so overvalued that -80% feels like a "correction" more than a "crash".

Like Nikola is down 94%, but it's still worth $3 billion on paper. This is for an electric vehicle company that staged a video of one of their vehicles being driven, only for us to learn in a fraud trial that it was rolling down a hill, with the excuse that they never claimed the vehicle was moving under its own power, just that it was "in motion." The company is worth nothing at the moment; any "worth" it currently has is a speculative bet that it will eventually produce something of value.

We need to start seeing the GOOG, META, AMZN, etc. stocks tank 80% before we can compare to the dotcom bubble, IMO.

> it's terribly illiquid

I'm amazed at how many people that get a significant portion of their comp as RSUs hang on to their shares after vesting.

During this insane bull market it's happened to work out, but having your income and a major portion (for most tech workers) of your assets perfectly correlated is absolutely a bad investment idea, not to mention the fact that you can only trade during approved windows and are not allowed to do any hedging (such as buying protective puts).

Even if you're wildly bullish on your company, at the very least diversify a bit with highly correlated stocks (for example if you're a GOOG during the last decade at least split it up among other FAANG). This way you can at least protect yourself in the event that your particular company gets hit hard.

It's incredible how far away the dotcom burst is in people's minds (or even 2008). Cheap money has led to an insane period of growth in tech, but investing as though that were the norm is very risky (without even optimizing your reward for that risk).

The best financial decision I ever made was to sell my shares after vesting.

I realised that even if I believed in the long-term business model of the company, having a significant portion of my money tied up with a single stock was not a good idea.

It would have still been a good idea even if those shares hadn't lost 90% of their value in the following year.

I was working for a major tech company—definitely not a startup during dot-comb. I had some amount of vested shares which seemed a lot at the time. I spent some but held onto a few tens of K$. Stock went down from over $100 at peak to about $4. By years later had recovered to about $25–and then Dell acquired for a premium.

Tech base salaries are so high that it's easy to keep RSUs. Also, IME, within the last ~18+ years it's been extremely beneficial to hang onto them.

There's literally no advantage to hang onto them, versus selling them on vest day and reinvesting in a wide set of tech stocks (if that's what you want to invest into).

There is an advantage if you are in the middle of a tech rally, and the other option is the investing in whole market.

All you need to do is time the next downturn...

I have (and continue to) err on the side of diversification. Without fail, I have simultaneously regretted it and done better than colleagues that held and tried to time the market.

I could have realisitically made 2x what I did. However, I also could have made half as much (and know people that did halve their income playing these games). Halving my income would have had a much bigger impact than doubling it.

There's still no advantage in a tech rally, you'd be far better of reinvesting highly correlated companies, where you have much more liquidity (since you're not only allow to sell during trading windows) and you also are allowed to perform better hedging in the case the market does start to get shaky, plus your portfolio will not drop based on the possible misstep of a single company.

> I have (and continue to) err on the side of diversification

I'm in the same camp as you, and the point I always make is that: If I'm wrong and our company stock sky rockets, beating everyone else in the market, then great! I still have unvested RSUs, we'll get larger bonuses, plus my job security has increased, sure I missed out on even more gain but I'm in a good place!

If I'm right, and something bad happens to my employer, at least my loses will be reduced by my other investments. I don't have to worry about everything falling apart at once.

Which I suppose is the entire point of variance reduction in the first place: it makes the great times a bit less great, but also makes the worse times not so bad.

I generally agree with selling as soon as possible but there are some significant capital gains tax advantages for holding vested RSUs for a year. 15 to 20% vs. 32 to 37%.

They’re taxed as ordinary income when they vest, and only gains and losses from that point are considered capital gains or losses. And your cost basis is the value they vest at, so it’s no different than getting cash and buying those shares immediately. No special advantage to holding for a year vs any other stock you acquire with cash.

> They’re taxed as ordinary income when they vest

That's correct, whether you sell them immediately or hold them.

> and only gains and losses from that point are considered capital gains or losses

That is also correct and was my original point. If you sell immediately, you've already paid the (personal income rate) tax and you're done. But if you don't sell immediately, waiting a year is preferable so you are able to claim the long term capital gain rate instead of paying the short term/income rate.

But those benefits and trade-offs have nothing to do with RSUs, it’s just how all stocks are treated. And thus not relevant to a consideration of whether to hold RSUs or sell immediately on vest.

There is no difference between holding them for a year compared to selling when they vest and then buying another stock and holding that for a year.

Actually there isn't, other commenter explains why.

Selling them instantly also protects you from selling based on insider knowledge later (most employees won’t really hit this but who knows).

Endowment effect.

Or simulation heuristic: https://en.wikipedia.org/wiki/Simulation_heuristic

Yeah. I didn't know the name for this, but have seen it.

My data point is the opposite, the one time I accepted equity in the form of options, stayed 4 years to vest it all, and got lucky where the company was acquired, the payout before taxes was worth less than if I had simply negotiated an additional $10k before taxes on my salary.

I’m not optimistic for future employers offering me equity actually worth more than cash over the 4 years it takes to vest.

Do you mean "traded cash for stock"?

I guess it's a bit ambiguous which direction you mean, either way. Maybe "gave up stock in exchange for cash" or vice versa?

Yeah, fixed it in my comment - thanks!

This is the same as statistically from loading a 401k out performs DCA throughout the year.

Sure this year sucks, but if only 1-2 years out of 8 perform worse, BUT 6-7 years you perform better. Then holistically you’re still better off.

When you invest look at the long term not short term.

Isn't this dependent on timing and isn't part of the point of DCA to mitigate timing risks?

E.g., If I loaded my 401k just before the bottom fell out of the market, you need a much higher proportion of good years to dig out from that hole. With DCA, you would have a shallower hole to climb out of.

(Possible I misinterpreting what you meant, or that I am just not financially saavy enough to chime in)

But on average the market goes up. You can lose with lump sum investment as early as possible. But you will be more likely to lose by waiting and only slowly purchasing in. The value of DCA is in emotional regulation since it softens swings at the cost of reduced expected value.

Doesn’t this ignore the asymmetry in risk? The colloquialism is that a bull climbs the stairs and a bear jumps out the window. Implying there’s much more downside risk to bad timing than upside potential. Is there work on a risk-based comparison between the two?

It depends on what stage your company is, but the vast majority of start ups fail… so for most people at startups, cash is going to be much more reliable. I worked at two startups prior to my current job that both went out of business. I had a few opportunities to take more equity or cash, and I’m glad I took cash every time. I would have gotten zero if I took the equity.

"Every time I've traded cash for winning lotto tickets it's worked out for me in spades in the long run."

https://xkcd.com/1827/

When they were printing money endlessly and rates were low, your strategy is sound. However, the house of cards is now crumbling and there is no end in sight to rate rises.

My hedge fund manager friend for a private family office is saying we will see double digit rates by end of 2023. If you believe this then you know what to do. If not, you should at least think what such macro conditions would do to liquidity.

Sounds like the thing to do now is sell everything vested so far, then hodl new vests. Falling prices means the vests will hit with lower income (and smaller tax bill) but are likely to go up when interest rates fall again.

ELI Financially Illiterate. What do high Fed interest rates mean in this case?

People invest more in companies when interest rates are low, because shoving it into lower risk vehicles becomes less profitable / likely to beat inflation. As interest rates rise, the value of safer places to put your money, such as bonds, increases.

This is the super simple version.

Also money market returns are significantly higher.

- Higher int rates make it more expensive for companies to borrow, and to invest in additional production capacity. Depending on the company, this can cause their stock price to decline as lower investment usually signals lower revenue growth in the future.

- Higher int rates also encourage consumers to put money into savings accounts and bonds instead of stock markets, which lowers demand for stocks --> lower stock prices --> market indices fall as well (S&P500, Dow Jones Industrial Average). Movements in these indices are considered a barometer for the broader economy.

It means the stream of capital being injected into companies, startups, incubators is inversely correlated to fed interest rates.

Likewise for real estate sector, the monthly mortgage payments increase as rates rise and that puts a big strain on the mortgage holder to continue.

Now instead of real estate, think startups, stocks, tech. Everybody is beholden to the obligations at the rate dictated by the fed.

It means that there will be less investment cash pumping up the valuation of startups.

High rates means that there is less liquidity overall (people don't want to borrow money and invest it), and it means that there are decent alternatives to investigating in startups (if T bonds pay 10% guaranteed, why burn cash on a company that will probably fail?)

Stock price is calculated as a sum of future cash flows (dividends D, for example) discounted by time value of money (risk free rate r, for example): sum(P_n), where P_n = D / (1 + r) ^ n and n is a year. When rate r is up P automatically down.

it'd mean your savings account would beat the S&P500 (after it finds a bottom obviously; this year having cash in a 0% savings account has been amazing!).

When the risk free rate goes up (which is what happens when the fed increases rates), then risk gets re-priced across all assets.

Is your hedge fund manager friend shorting bond funds like crazy? If not, why not?

One would think so but he is cash and says he is unsure. He thinks that inflation may not be curbed even with low double digit rates!

Considering they’re pushing 75% in Argentina, 10% sounds like a deal.

> it's been very good to me on three separate occasions.

Were those occasions during the mass retirement of the boomer generation leading to accelerating liquidation of stock market positions while the replacement generations are inadequate in number to replace the retirees during the collapse of globalization likely causing drops in worker productivity? Or were they during the longest stock market bull run in history?

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