Hedging Against Getting Paid in Stock
barisser.com
barisser.com
What, did you think you were the first to think of this?
Also, how would you ever get caught if you just ignored what it said in the handbook?
At this point, I assume that everything you do is known to everyone. It's unfortunate, but it's also the sensible assumption. Even if the law would seem to prevent them from discovering your actions, there's no reason to believe that law will actually protect you. At the very least, they can almost always fire you without any reason at all, so even the slightest suspicion is sufficient. They don't need to prove it in criminal court.
I've worked in finance and for several publicly traded companies and have never been barred from trading stock in our competitors (other than if they were a takeover target or potential acquirer in active talks with us and that I knew about that, which is vanishingly rare).
You're allowed to own stocks in this example, but you generally wouldn't be allowed to trade on them.
(I expect transaction costs would nuke this idea, but I'm somewhat curious how sophisticated big company employee agreements are.)
Short the index and long everything but your SECTOR is probably OK. That's just a bet against your sector. Short the index and long everything except your specific COMPANY is not going to be defensible. (In my policies, it's more straightforward to just short the sector directly, if such an instrument exists.)
The best advice is simply to sell as early as possible (note, this is not financial advice).
But the important thing is that during salary negotiation, asking for everything in cash is not an option. So actually turning down equity based compensation (at least in this case, I'm not commenting on pre-IPO situations) is extremely bad advice. Equity should be discounted because of the risk, but RSUs are worth real money and should be treated as such.
[0] https://www.linkedin.com/pulse/20140918211244-22433455-your-...
It is not sufficient to discount them for business risk or interest rate risk or any of the other common risks; they must also be discounted for concentration. Unless you were born into a large trust fund or have already accumulated vast wealth (and expect to work for only a short time more), the discounted present value of your expected future salary is going to be your largest asset. That asset is substantially dependent on the business and market fortunes of your employer; therefore, any further exposure to those fortunes represents additional excess concentration. Even if your downside exposure is limited, as it is with RSUs and options, that exposure must be devalued if it represents excess concentration. For most people, the proper devaluation is going to be 100%. You already have too much exposure to your employer. You want to lay off that exposure any way you can (as the author understands), not add more by accepting equity in lieu of cash.
It's simply not correct that demanding cash is not an option. It's a business negotiation; anything is an option. You may not get all, or even any, of what you want, but categorically refusing to ask for it is seldom a winning strategy.
>For most people, the proper devaluation is going to be 100%.
The author argues, correctly, that exchanging stock for its current market value is a good deal. I agree (and I also agree with you that there is extra risk from having your own company's stock). But from none of this does it follow that we should discount stock units by 100%. That is like saying that an offer of $100 with 50/50 odds, would be worth 0, or would be worth zero if the coin toss was correlated with some life event.
I think the problem with your reasoning is that you are treating risk as a concept of independent importance, while it is really a derived concept, with the fundamental concept being the utility from a probabilistic cash flow.
>It's simply not correct that demanding cash is not an option. It's a business negotiation; anything is an option. You may not get all, or even any, of what you want, but categorically refusing to ask for it is seldom a winning strategy.
Having been involved in these negotiations and seen people's salaries and stock grants (through legitimate means), I can say that trying to get more base salary is really hard, and not worth the time. Even if you got more salary, it would come at the cost of so much less stock that it wouldn't be worth it.
It's not the outcome, it's access to material information. Anyone who has access to sales or revenue information can come to reasonable conclusions in regards to underperforming/overperforming come earnings time, and trade on that information.
> ... the prosecution will assume you had some insider info to trade on. The onus is on you to prove that you didn't.
If you want to tango with people that salivate at prosecuting people which profited from hedging while employed at the company which they hedged, I can only recommend against that course.
It will end badly.
Hedging out your stock based compensation goes directly against this, and misaligns you with the rest of your company. I think if you don't believe in the companies prospects it is best to take another job or ask for more cash and less equity.
It doesn't work for non-listed startups. Lots of idiosyncratic risk, and no liquid market in the shares.
If by "this will work" you mean you will likely have the SEC, IRS, the company's own litigation department, and perhaps the FBI filing various civl and criminal charges against you, then yes it will work.
As "prostoalex" stated earlier, this is insider trading. Even if the person doing it thinks it isn't, it will be up to them and their lawyer to prove otherwise (a.k.a. "the defendant"). And that kind of proof don't come cheap (think $200,000+ USD depending on how pissed off the employer is).
I could retort with an equally glib "why don't employers just pay their employees in cash?"
You are right that you get leverage with options, but there is no free lunch.
Cash for startups with strongly and increasingly negative cashflow is NOT cheap.