If you started at Airbnb several years ago, you might be coming up hard and fast on an unpleasant deadline: The expiration of your options.
If you don’t exercise, you lose the options and all their potential value. If you do exercise before Airbnb goes public (and who the heck knows when that’s going to happen, at this point), you’re putting every penny at risk.
This is a hard, hard position to be in. And probably especially hard given all the optimism about Airbnb just half a year ago!
We’re walking some of our clients through this unpleasant discussion right now.
Let’s start with the hope that Airbnb goes public, or at least files its S-1 (a not-guaranteed-but-pretty-darn-likely sign that they’ll go public) before your options expire. You can simply delay making a decision until the risk has been, thusly, waaaaay reduced. If Airbnb is public, then you could immediately sell any shares you get from exercising, thereby not putting your money at risk.
That’s the easy scenario. But what if Airbnb doesn’t go public in time?
If you’ve got options that are expiring in the next year, as some of our clients do, and it’s kinda hard to envision Airbnb going public before that, then you’ve got some hard choices to make:
- Wait until you have to make a decision. That is, wait until right before your options are about to expire. A lot can happen in a few months. As we most certainly know now!
- Use a service like the Employee Stock Option Fund to exercise your options. (This is not an endorsement.) Pro = you don’t put much, if any, of your own money at risk. Con = if Airbnb does well, you’re gonna fork over a lot of the value of your stock to this company. This is a lower risk, and therefore a lower reward, path.
- Exercise your options now/soon with your own money.
Exercising Your Options Now/Soon with Your Own Money
If you’re considering plowing more of your own money into Airbnb stock by exercising options, think about how much of your potential net worth is already tied up in Airbnb.
If you exercise options now, before Airbnb goes public, you are shifting even more of your net worth into Airbnb. The heavier the imbalance, the riskier it is.
Let’s use easy math:
- If you have $1M in cash and investments.
- $4M worth of Airbnb stock (at current valuation).
- Airbnb represents 80% of your potential net worth.
- If Airbnb eventually goes the way of WeWork (I know! I know! That’s too extreme! But clearly, it’s within the realm of possibility, even if you choose to believe not-probability.) then you’ve just lost 80% of your net worth, and you have $1M left.
Let’s say you use $500k of your cash and investments to exercise stock options right now. Now you’re at:
- $500k in cash and investments.
- $5M worth of Airbnb stock (I just made this number up, as it really would depend on the strike price of your options and tax situation).
- Airbnb represents 91% of your potential net worth.
- The possibility of losing 80% of your net worth is bad enough. 91% is bonkers. And now you have “just” $500k left, if Airbnb meets a messy end.
Other Considerations When Exercising
These considerations are big issues unto themselves, and therefore too messy to get really into in this blog post, but they’re worth bringing to your attention:
- Keep in mind that you could possibly exercise options and then sell some of those shares quickly on the private secondary market, thereby reducing the amount of your own money at risk.
- If you are going to exercise your options, investigate—with a CPA—whether you can pay lower taxes by exercising in 2020 versus 2021 versus some in both years.
Pay Attention to Your Grocery Money.
On a related note, what’s your liquidity like? Most simply, this is cash. But it also means your liquid investment accounts (taxable brokerage accounts, or hell, even your 401(k) as a last resort). You can turn all of these things into groceries (my personal definition of “a liquid asset”).
The more you plow that money into Airbnb stock by exercising options, the less liquid you are. The less easily you can respond if your personal economy turns to sh*t. You certainly don’t want to dig into your emergency fund to exercise any options. But even cash beyond that…is this the time to be putting your money at risk?
(Your answer to this question might be “Yes.” I don’t mean to imply “No” is the only sane answer. Though it’s probably the right answer in more cases than not.)
Run Some Thought Experiments.
Let’s say you choose to exercise your options, and fork over a goodly amount of money in both strike price and ordinary-income tax.
- Fast forward to April 2021, just one year from now, and Airbnb goes public at a value of $60/share. Maybe you have even paid more in strike price+taxes than the stock is now worth. How do you feel? How does the hit to your finances change your ability to live the life you want?
- Another scenario: This quarantine comes and goes for the next two years, people simply aren’t willing to start traveling again, demand doesn’t recover during this time, and Airbnb can’t survive a quasi-permanent reduction of its revenues by 80%. Airbnb is acquired at fire-sale prices by another travel company, and your stock becomes worthless. How do you feel? How does the hit to your finances change your ability to live the life you want?
Now let’s say you choose to not exercise your options, and they expire, worthless to you.
- Fast forward to April 2021, and the epidemic has been tamed, people are beginning to travel again, and optimism once again fills the air. Airbnb goes public at a price of $130/share…and you get none of it. How do you feel? What will you not be able to do in your life because you don’t have the money? What will you have to do differently?
This is not an all-or-nothing decision. I’ve sketched out the two extremes above. Where do you feel best along the spectrum? Can you exercise some of your options prior to expiration, and let some expire? More, or fewer?
I know I haven’t exactly given you an answer. I’ve given you something about as far away from “an answer” as is possible. I’m sorry! I wish I could!
When future events are in play, we simply can’t know the right answer. We can only come up with one that we think is most likely to protect us against unbearable losses, and that will give us an opportunity to participate at least some in Airbnb’s potential riches. Any confidence beyond that is just straight up wrong.
Do you want to work with a financial planner who understands both the technical implications and the “ineffabilities” of Airbnb stock? Reach out to me at or schedule a free consultation.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.