Airbnb is going public. You have stock options. Likely you also have RSUs and possibly even outright shares of stock. Does it all feel like one inextricable heap? How will you ever create a comprehensive, comprehensible strategy for all of this?
Let’s do this thing.
[Note: As of this writing, it’s still not known whether Airbnb will go public via an IPO or direct listing. For the ease of writing, I use “IPO” except when the differences between the two approaches could have a meaningful impact on you.]
What’s Important to You?
If you read last week’s blog post about RSUs, this heading might seem familiar. I don’t have anything to add to it. It is still the most important factor in your plan for Airbnb going public.
Ground your technical strategy for Airbnb in your understanding of what’s most important to you.
Are Your Options Expiring Soon?
If you have options that are expiring in 2020 or early 2021, you’ve got an extra level of stress right now.
We don’t know when Airbnb will go public, and it’s still possible that their plans will make it impossible for you to exercise your options before they expire. (Until we see the S-1, we simply don’t know.) The last thing you want to do is lose the options because you are unable to exercise them when the expiration date rolls around.
There are two particularly good times to exercise options in a private company (Wealthfront’s Guide to Equity & IPOs also goes into this):
- Early: when the company is young (when the options are cheap to exercise but the risk is high that the company will come to nothing) and
- Late: when the company is on the verge of going public (exercising is more expensive, but the risk that it’ll come to nothing is much lower)
Airbnb clearly satisfies the “Late” requirements.
It’s a decision you have to make:
- Don’t exercise now/soon and risk losing the options (and the potential wealth associated with them), or
- Do exercise now/soon and risk losing your existing wealth. For example, imagine if you’d exercised all your options in WeWork when they filed to go public…bye bye money.
What We Still Don’t Know about Airbnb’s IPO Plans
One thing I’m hoping the S-1 will make clear, when it finally becomes public, is when you’ll be allowed (or disallowed) to exercise your options. The specifics are going to have a major impact on your about-to-expire options:
- Will there be a lockup? IPOs usually do; direct listings are less likely to but still can. Which will it be for Airbnb? If there’s no lockup, you have much more flexibility.
- How long will the lockup be? The shorter it is, the less likely you are to be “caught” by it and watch helplessly as options expire.
- What can you do during the lockup? We know “not selling.” But can you exercise options? If so, then it doesn’t matter nearly as much whether there’s a lockup. It might affect the need for you to bring lots more cash to the table to exercise, but at least you can.
Complications and Possible Solutions
It’s too expensive to exercise them all. Maybe you have so many options about to expire that exercising them all requires a lot of money. “A lot” is subjective, of course, but there are people out there who’d need $1M+ to exercise all their soon-to-expire options.
What can you do in this situation? A few ideas:
- Use a financing service (for example, ESO Fund, SecFi…not an endorsement), which will front you the money in exchange for a percentage cut of the eventual value
- Exercise a bit at a time, and sell the first wave or two of resulting shares on the secondary market, to get you cash to exercise the remaining options.
- Borrow money from some of the few banks willing to bankroll options exercise (for example, First Republic Bank, Silicon Valley Bank…again, not an endorsement)
Each of these solutions has pros and cons. I just want you to know what’s available to you.
You might be constrained by a restricted exercise period. You cannot exercise your Airbnb options just whenever you want. Similar to blackout periods for employees at public companies, private Airbnb allows you to exercise your options only during certain times.
Because Airbnb could go public really at any time (we still don’t have any details), please go find out right now when you’re allowed—and not allowed—to exercise your options. Paying attention to the timing of the IPO and the restricted exercise period is urgent.
Should You Exercise and Hold, Exercise and Sell, or Keep Your Options?
The lovely thing about options is that exercising them is a choice.
- Until you exercise them, you protect yourself entirely from loss. You don’t put any money out, so there’s no money to lose. Not exercising is the least risky approach.
- Exercising them means you’re betting that the stock will be worth a certain amount in the future. With that bet comes the possibility of making more money, but also the possibility of losing money you already have.
The situation is also slightly different now—while Airbnb is still private—than later—when Airbnb is publicly traded.
This section is pretty tactical. It assumes you already have a reasonably good sense of what money you want to be sure to protect (by selling stock) and what money you’re willing to continue to risk (by holding stock).
While Airbnb Is Still Private
As mentioned above, Airbnb is at a stage where it’s generally considered a good time to exercise. Exercising is more expensive because the stock is worth a lot (though nothing like it was late 2019!), but the risk that it’ll come to nothing is much lower (note: not “nonexistent”).
Exercising now (unless you “have to,” to avoid losing the options) is entirely motivated by reducing taxes:
- Smaller “spread” subject to tax
When Airbnb goes public, its price will be above its current 409(a) (you hope). Especially if you have NSOs (where the spread between the exercise cost and current price is subject to ordinary income tax), this lower price can mean a much lower tax bill. It still helps in the ISO department, too, just a bit less directly/simply.
- Long-term holding period means a lower tax rate
If you exercise now, you have less time to wait after Airbnb goes public in order to get to a full year holding period, at which point the gains are subject to a lower long-term capital gains tax rate. This is more useful when it comes to ISOs than NSOs.
This doesn’t mean that unequivocally you should exercise now. It’s a balance of:
- how much money it takes to exercise your options
- how much risk you’re willing to take (exercising without immediately selling is always risking that the stock price will go down)
Consider selling on the private secondary market. While you can. The fact that Airbnb has had a very active presence on the private secondary markets does sort of confuse this whole thing. Usually investing money in a private company in this way means that you just have to hold on and hope that the company does well and goes public so you can get your money back.
With Airbnb, you’ve been able to sell your stock through the private secondary market for years now, which means you can turn your Airbnb stock into real money even while it was still private. This reduces the risk of exercising options.
The window to sell on the private secondary market might close any time now, judging from my recent conversation with a colleague at one of the well known platforms. When Airbnb finally sets a date to go public, private transactions could stop.
After Airbnb Goes Public
When to exercise—and sell—in a public company is basically a mix of two considerations:
- Personal: How much do you want to reduce your exposure to Airbnb stock?
- General (rule of thumb): Hold on to options until the “leverage” falls below 40%.
40% Leverage. Remember in a recent blog post when I talked about many financial rules being “arbitrary but reasonable”? Here’s another example.
First, don’t get hung up on the word “leverage.” It might help some people and confuse others (as it did me for so long). Refer to it as “kangaroo” if it helps. It’s just a calculation: the exercise price of an option as a percentage of the stock’s value.
Why is this calculation important? Because it tells you how much the value of your option rises or falls when the stock value rises or falls. Look at this (fairly extreme, for illustrative purposes!) example:
Same stock. Same stock price. Same change in stock price. Different exercise prices, which leads to different leverage, which leads to a different impact on the value of the option.
- The lower exercise price means that if the stock rises $5, the “intrinsic” value of the option goes up only 5%. Basically, you’ve already milked all the value out of the option because the stock price is already so far above the exercise price.
- The higher exercise price means that if the stock price rises that same $5, the “intrinsic” value of the option goes up a lot (50%). The fact that the same dollar increase in stock leads to a much larger percentage gain in the leverage of the option is the “leverage” we’re talking about.
And in case a visual might help with this:
You can calculate the leverage of your options, if you like, without even fully understanding it. I did this by rote myself for a while until I “got it.” The general rule is:
- the higher the leverage, the more you should hold on to the option.
- The lower the leverage, the more you should exercise and sell the option.
40% is a somewhat arbitrary, but again, reasonable cut-off.
Optimizing If You Have Multiple Grants
If you have multiple grants of exercisable options—different exercise prices, some ISOs and some NSOs—you can exercise, sell, and hold different grants to optimize your risk and taxes.
Here are a couple examples:
- Exercise just enough ISOs to avoid paying Alternative Minimum Tax (the only money you’re putting at risk is the exercise price, not also taxes) and hold for over 1 year (for a lower tax rate). Simultaneously exercise and immediately sell NSOs, to both reduce your concentration and generate the cash you just spent to exercise all the options and to pay the NSO taxes
- Exercise and sell the grants with leverage < 40% and hold the others
- Exercise and sell the grants that are about to expire and hold the others
The Risk of Having Too Much Airbnb Stock
[Spoiler: Basically a repeat from the blog post about RSUs]
How much of your wealth is tied up in Airbnb stock (or, in this case, the potential for Airbnb stock, i.e., options)? The higher it is, the more risk you take on. This is a basic tenet of investing: Diversification lowers risk. Concentration (in this case, in Airbnb stock) raises risk.
How can you figure this out? I find inadequacies with every way of doing it, but I think a reasonable way to calculate it is this:
Even though options aren’t actual money, they still represent possible wealth, and it’d be a shame to squander it.
The more your wealth is tied up in options, the more you should consider exercising and selling, to turn that possible wealth into actual wealth.
If You Also Have RSUs and Existing Shares
When you have not only RSUs but also options and/or outright shares of Airbnb, you get to be even tax smarter-er.
Let’s say that, as part of your overall strategy, you decide to sell some stock. You’re then looking at your vested RSUs, your unexercised options, and your existing Airbnb stock wondering, “Well, which should I sell first?”
The whole point here is to reduce your holdings in Airbnb stock with the smallest tax hit. Your primary focus is reducing your holdings, but you’re trying to do it in a tax-optimized way.
General order of selling out of Airbnb stock:
- Vested RSUs: Sell these first. You will have only held them for a short amount of time, not much time for the stock to change in value. This will likely generate the smallest tax hit to reduce your overall holdings in Airbnb stock.
- Shares you’ve held for over a year
- Exercisable options: Options give you leverage, which is desirable in this case. Outright shares have no leverage, so get rid of those first.
As I mentioned in my post about donating Airbnb wealth to charity:
If you want to donate Airbnb to charity, do not donate recently exercised options. Donate only those shares you’ve held for over one year and that have the highest percentage gain.
What You Should Do Now
This has been a lot of words. A lot of technical and tactical ideas. Here are the three things I think you should do now:
- Consider exercising your options before the next restricted exercise period starts (on 9/15) if your options are expiring soon.
- Really, truly, hire yourself a CPA who’s familiar with this stuff.
- Talk this through with someone to help get clear on “what do I want in life, that this money can help me achieve?”
Other posts in this “Airbnb is going public” series:
1. Airbnb Is Going Public. Time to Create a (Flexible) Strategy.
2. Airbnb Is Going Public. What a Good Time to Give Away Your Money.
3. Airbnb Is Going Public. What Should I Do with my RSUs?
Do you want someone to guide you through Airbnb going public? 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.