First, you mentioned your brother-in-law has "$100,000 in stock options (fully vested)". Do you mean his exercise cost would be $100,000, i.e. what he'd need to pay to buy the shares? If so, then what might be the estimated value of the shares acquired? Options having vested doesn't necessarily mean they possess value, merely that they may be exercised. Or did you mean the estimated intrinsic value of those options (estimated value less exercise cost) is $100,000?
Speaking from my own experience, I'd like to address just the first part of your question:
Have you treated this as you would a serious investment in any other company? That is, have you or your brother-in-law reviewed the company's financial statements for the last few years? Other than hearing from people with a vested interest (quite literally!) to pump up the stock with talk around the office, how do you know the company is:
- Valuable? Is the balance sheet healthy? How many shares & issued options are there?
- Not heavily indebted? Are there significant loans or credit facilities that have been drawn down?
Might there be a potential credit event around the corner?
- Profitable? What does the income statement look like? Are margins healthy?
- Solvent? Do they realize enough profit as cash to cover current liabilities and then some, or are they profitable on an accounting basis but not generating ample cash?
- Growing? How do revenue, profit, etc. look compared to previous years?
- Free from significant conflict-of-interest? Have any owners / officers disclose material transactions with the company? Do such arrangements appear within reason, or cause for concern?
BTW, as an option holder only, your brother-in-law's rights to financial information may be limited. Will the company share these details anyway? Or, if he exercised at least one option to become a bona-fide shareholder, I believe he'd have rights to request the financial statements – but company bylaws vary, and different jurisdictions say different things about what can be restricted.
Beyond the financial statements, here are some more things to consider:
- Is there a shareholder agreement? Many private companies use these. How would the agreement bind you? How might it restrict a future share sale or transfer? Could a sale to another shareholder / employee be vetoed, or just subject to a right of first refusal?
- Is there even such a private market? Has anybody sold their shares to another shareholder? What were prices for recent deals? Financial statements may inform your own share valuation, but are shareholders valuing the shares — through transacting – above the option's exercise price?
- Beyond the founding owners, are there other stakeholders, e.g. venture capital or venture debt, with special rights? What are these rights and how might they impact your investment?
- Is there any intellectual property? e.g. are there patents that are valuable but not accounted for? Is the company involved in any ongoing IP litigation (or other legal issues)?
- How dependent is this company on one (or a few) large customers? Say, is there one client that constitutes 50+% of revenue? What if that client goes away? How do the financials change?
The worst-case risk you'd need to accept is zero liquidity and complete loss: If there's no eventual buy-out or IPO, the shares may (effectively) be worthless. Even if there is a private market, willing buyers may quickly dry up if company fortunes decline. Contrast this to public stock markets, where there's usually an opportunity to witness deterioration, exit at a loss, and preserve some capital.
Of course, with great risk may come great reward. Do your own due diligence and convince yourself through a rigorous analysis — not hopes & dreams — that the investment might be worth the risk.
