There seems to be a general rule of thumb among investors and founders I've talked to that the vast majority of options won't vest or will go unpurchased, and as a result it seems many have tried to keep things as opaque as they can. As a CEO and Founder I find this incredibly troubling and I believe it's contributing to why so few folks value sweat equity anymore. I've written a few thoughts on this before for anyone interested: https://medium.com/busyness-time/part-i-how-were-building-st...
Ask HN: Is it just me or do a lot of people not know how stock options work?
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Re: Ask HN: Is it just me or do a lot of people not know how stock options work?
#12Keep in mind when you say "stock options," it can mean different things. The first thing that comes to my mind when you say "stock options" is options trading on publicly traded companies. That is buying and/or selling contracts of puts and/or calls.
The second is "stock options" at private companies as compensation, which is what you are referring to. There are many variations on how this works.
I've seen companies, as a bonus, grant what amounts to a call option that can't traded and only exercised at some point in the future. This may be free or you might have to pay for it.
I was once given stock as a bonus at a startup, making me an owner. Being an owner didn't pay me any sort of dividend, but it massively complicated my income taxes by giving me a K-1 in May (after April 15th). Additionally, I owed tax on my percentage of ownership, which was really a pain. The other gotcha but I wasn't allowed to be an owner unless I worked there. So when I quit, I got cashed out at "fair market value," which was a B.S. number they made up and gave me a couple thousand dollars. I also got diluted by half while I was an "owner." The experience made me very leery of ownership. Now I just look for salary.
Re: Ask HN: Is it just me or do a lot of people not know how stock options work?
#13many employees don't understand the basics of stock options, hence they don't value equity as much as employers / investors do The fact that I know the basics of stock options is precisely the reason I don't value equity as much as employers or investors do. I can count on two fingers the number of companies whose stock options put money in my pocket, and one of them is Microsoft. I would need many hands to count the…
big companies like Microsoft/Google/etc don't even offer most of their employees stock options, but instead they offer RSU (Restricted Stocks Units). Those are easier to understand, there's no exercising decision to be made, you just need to know your vesting dates. The biggest decision is : Do you want to sell your stocks before or after the 1 year Long term capital gain wait, but that decision is common to all stoc…
big companies like Microsoft/Google/etc don't even offer most of their employees stock options, but instead they offer RSU (Restricted Stocks Units).
Microsoft used stock options when I worked there, hence my use of it as an example.
Re: Ask HN: Is it just me or do a lot of people not know how stock options work?
#14No, this is not just a problem you're having.
I was an early engineer at Zenefits and found myself holding stock options seminars to explain this stuff to the rest of the engineers.
I built optionvalue.io as a calculator to help people answer some basic questions about what their stock is worth, and I'm building it out more to answer questions (eg, tax implications and exercise windows).
I've talked to grellas and some other folks with a long, long history dealing with this stuff. There seems to be some consensus that:
(1) People now are more educated about stock options than they've ever been.
(2) That's a pretty low bar.
Re: Ask HN: Is it just me or do a lot of people not know how stock options work?
#15Keep in mind when you say "stock options," it can mean different things. The first thing that comes to my mind when you say "stock options" is options trading on publicly traded companies. That is buying and/or selling contracts of puts and/or calls. The second is "stock options" at private companies as compensation, which is what you are referring to. There are many variations on how this works. I've seen companies,…
You're right, I thought it would be clear from the context that I'm talking about employee stock options.
It seems like your experience with stock kind of proves my point and reveals the employee side of this problem — because you didn't fully understand how all these things work, and no one explained it to you — you had much different expectations.
And now, instead of incentivizing you to stay, you employer leaves you frustrated and basically incentivizes you to leave.
Re: Ask HN: Is it just me or do a lot of people not know how stock options work?
#16There are 2 things which people are very financially illiterate about these days. Stock Options, and how income taxes work. You've covered the former, with the later I've seen confusion with how progressive tax brackets work, how deductions work, etc. All you can do is to make sure you understand it, and be careful of the advice you get from others.
I was taken aback when I realized just how few people understand the United States progressive tax system and how income tax brackets work. That misunderstanding is so pervasive (in my experience) that I can't even imagine people having a general understanding of how deductions work at all.
Re: Ask HN: Is it just me or do a lot of people not know how stock options work?
#17When it comes to stock options, HN has taught me two things: 1. They are worthless, as >90% startups fail and you won't be getting anything in that case. 2. If they are not worthless, you might not be able to afford paying for them anyway [1]. Add to that how difficult it is to get a simple, clear answer to the question "how do I invest my money?". So yes, I wouldn't be surprised if most people didn't know how stock…
I feel like I've matured on this question over the years, so to caveat #1:
90% of options are worth nothing if you count by companies granting, but probably 90% of options are worth something if you count by people receiving grants.
How does that work? Because companies which grow and become worth something hire a metric ton of people and give all of them options. If you're of the opinion that most engineers in San Francisco work for a seed stage startup, you're just straight up not correct. It only seems that way because of availability bias.
Thus the reason for this comment: it's very, very dangerous to get people in our industry thinking "options are ipso-facto worthless" when our industry builds packages for substantially all engineers where they're a material portion of one's compensation. You can find all-cash offers out there, particularly from non-tech employers of engineers, but the standard in our industry is cash plus a substantial equity component, and (as someone in the industry) you really, really need to have a deeper understanding of equity than "all equity is worth zero."
Though the capitalist in me says "If one really thinks that all equity is worth zero, you will find many people willing to take yours off your hands at pennies on the dollar once that becomes feasible for your company."
Re: Ask HN: Is it just me or do a lot of people not know how stock options work?
#18many employees don't understand the basics of stock options, hence they don't value equity as much as employers / investors do The fact that I know the basics of stock options is precisely the reason I don't value equity as much as employers or investors do. I can count on two fingers the number of companies whose stock options put money in my pocket, and one of them is Microsoft. I would need many hands to count the…
big companies like Microsoft/Google/etc don't even offer most of their employees stock options, but instead they offer RSU (Restricted Stocks Units). Those are easier to understand, there's no exercising decision to be made, you just need to know your vesting dates. The biggest decision is : Do you want to sell your stocks before or after the 1 year Long term capital gain wait, but that decision is common to all stoc…
MSFT was one of the big model companies for stock options and sharing the wealth around. I think they got rid of their stock option plan sometime under Blamer when the stock started paying a dividend.
Re: Ask HN: Is it just me or do a lot of people not know how stock options work?
#19I worked at a pre IPO company a few years ago and it was an exception to find people who understood how things worked. Hell, even I missed some details back then, and it was only after I put in hours of research that I developed a decent grasp of the tradeoffs and deadlines. I still don't really know how to do AMT though.
There are a couple of startups that make it a point to early through what their equity means with new hires. But this puts power into the hands of employers since some will be well meaning and some will mislead.
It's unfortunate that we don't have a "yo-yo" knowledge with a easy to remember URL we can point to. Plenty of great articles out there, including by prominent VCs. But it requires a lot of digging.
Re: Ask HN: Is it just me or do a lot of people not know how stock options work?
#20When it comes to stock options, HN has taught me two things: 1. They are worthless, as >90% startups fail and you won't be getting anything in that case. 2. If they are not worthless, you might not be able to afford paying for them anyway [1]. Add to that how difficult it is to get a simple, clear answer to the question "how do I invest my money?". So yes, I wouldn't be surprised if most people didn't know how stock…
Easier said than done, but you if there's any likelihood at all of success, you should make damn sure you have cash on hand to exercise.
Otherwise, you are literally losing a winning lottery ticket for want of pocket change.