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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?

#41

Post by AnimalMuppet »

chimeracoder wrote: post #5

To add to all of this, most people really don't understand the tax implications of options (whether they're ISOs, NSOs, or not options at all but instead are RSUs). It's hard to explain those without looking at a person's individual situation (the company, the initial value, the current valuation, and the person's tax bracket), which is why there's not a lot of talk about them. But the taxation can very easily be the…

True. But it's also important to not view taxes as the thing in deciding what to do.

I had options that I could exercise (at a big, publicly-traded company, so I didn't have the startup, no-liquidity issues to worry about). My options were worth quite a bit of money. I had already exercised enough to put me at the edge of the next incremental tax bracket. On about December 15, I was looking at it, and thought it was a really tempting price, but... taxes. I decided to wait for January.

Three days later, our company made an offer on another company. The stock market didn't like it. Our stock went down. I lost more than the taxes would have been.

Moral: When money is growing on trees, pick it.

Disclaimer: That isn't always good advice. If the price had continued to go up, it would have been really bad advice. But too much focus on taxes is also bad advice.

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#42

Post by pfarnsworth »

This has always been the case. I've been in Silicon Valley for ~20 years, and even back during the dotcom days, most employees didn't know much about stocks, let alone stock options. Given the fact that it's such an important part of Silicon Valley life, you would think that people would educate themselves more, but it hasn't happened in 20+ years. It's just human nature, and some people don't care, or think it's too complicated and ignore it.

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#43

Post by tamcap »

cglouch wrote: post #34
module0000 wrote: post #22

This bears posting, it explains actual stock options , not what employees/employers bandy about as "stock options". http://www.investopedia.com/exam-guide/cfa-level-1/derivativ...

I understand the basics of actual stock options, but get confused by employee stock options. What would you say is the difference?

You have 3 significant "problems" with employee stock options:

1) need to exercise them upon leaving: when you leave a company, a company might force you to exercise the stock option within 90 days of leaving (and this takes cold hard cash too!). This gives you stock in the company, BUT:

2) taxes: you have to pay taxes on "fair market value" of this income

3) illiquidity: you can't sell it (now, and potentially ever)

There are multiple blog posts dedicated to this problem, if you want to read more and at least try to understand all the caveats and the gotchas. I am still learning those, so take this advice with a grain of salt.

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#44

Post by ChuckMcM »

In answer to your question, the answer is "Yes, many if not a majority, of tech employees are clueless about stock options." I've thought about the reasons for that, and mostly they are around actual use.

Every startup, and nearly every company, that I've worked at had "the talk" about stock options, they went over ISO, NSO, and RSO. They talk about taxes and gains and tax law. They talk about vesting and cliffs and blackouts and strike prices. They dump a ton of data on your head.

And the problem is they are dumping it onto people who have absolutely no way to connect what they are saying to their own personal existence, and so they forget all of it. It is human nature, a brain defense, what have you that when you are given information that you only barely understand and has no immediate relevance to your situation, you promptly flush it out of your brain.

That all changes once the options are actually worth money and can be exercised and sold.

Once options have value they become relevant and generally a co-worker or someone more clued in will do something like buy a new car "using their options" or even just a new bike or TV. And that will trigger the questions, "Hey I think I have options maybe I should figure out if they are worth money." Sometimes this happens when you are being laid off or fired and you are given 90 days to exercise your options or lose them.

At that time, the information you develop about options will stick in your head because you needed it to accomplish some task, which ideally rewarded you with some extra cash that you didn't know you had access to. Later in the year this action will trigger you learning a lot more about the tax code than you wanted to know :-).

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#45

Post by DaiPlusPlus »

tptacek wrote: post #25
mikestew wrote: post #4

many 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…

Which, in turn, sets up a vicious cycle, because employers know that employees don't value equity as much as a cash-equivalent benefit, and respond rationally to that incentive by reducing equity grants. (This is a positive claim, not a normative one).

On the contrary, because it has a low perceived value they make up for it with volume. Look at how Uber throws insanely high paper-valued equity to its hires. Similarly when I worked for a startup I was promised almost a full percent of a company they expected to grow to a hundred-million dollar valuation. $1m for a year's work? Can't go wrong with that.

(Side note: I didn't get the equity as I was conveniently laid-off a few days before my cliff vesting date. Lovely...)

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#46

Post by skookum »

taude wrote: post #18
vmarsy wrote: post #10

Earlier quoted context omitted.

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.

That's correct. It was shortly after Steve took over as CEO. At the time a lot of options were underwater and Microsoft offered a buy-back plan where one could get a lump-sum payment in place of those options. In retrospect taking the buyback was the right decision as the Microsoft options had a 10 year expiry and most of the underwater options didn't climb back within their 10 year window.

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#48

Post by tptacek »

DaiPlusPlus wrote: post #45
tptacek wrote: post #25

Earlier quoted context omitted.

Which, in turn, sets up a vicious cycle, because employers know that employees don't value equity as much as a cash-equivalent benefit, and respond rationally to that incentive by reducing equity grants. (This is a positive claim, not a normative one).

On the contrary, because it has a low perceived value they make up for it with volume. Look at how Uber throws insanely high paper-valued equity to its hires. Similarly when I worked for a startup I was promised almost a full percent of a company they expected to grow to a hundred-million dollar valuation. $1m for a year's work? Can't go wrong with that. (Side note: I didn't get the equity as I was conveniently laid-…

I haven't seen that happen but I totally believe that it does. So there's two different ways things go haywrite because nobody knows how options work.

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#49

Post by emeritus »

btkramer9 wrote: post #32
emeritus wrote: post #30

Earlier quoted context omitted.

> 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 stocks. The decision is more along the lines of sell now vs. sell later. The LTCG decision is not nearly as important. The conventional wisdom is just to treat the RSU as the same as salary by selling immediately upon vesting. Since you're already employed and paid by…

When the RSUs vest you usually have the option to take all and pay the appropriate tax when tax season comes around OR take a reduced amount to cover the taxes. Do you recommend/have a preference? What are the pros and cons?

I'm at a company that automatically sells enough RSUs at vest date to cover withholding (the remainder is deposited alongside the regular salary). So that decision is made for me. No matter which option I'd take, I'd use the one that allows me to move as much money into retirement accounts, 401(k) etc. as quickly as possible.

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#50

Post by walshemj »

pawelwentpawel wrote: post #8

Can anybody share some info on how taking stock options in a US company differs from a UK one? A lot of the reading applies to US market. I'm wondering if any of the advice is not transferrable. Also, I believe that this is a good read - https://blog.alexmaccaw.com/an-engineers-guide-to-stock-opti...

Probably not as the UKs tax treatment Is much much more employee friendly.

If an approved share save scheme hits big as BT.A did 18 months ago you can make £150k Tax free as one of my friends did.

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