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

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

#71

Post by user5994461 » Wed, Dec 21, 2016, 1:39 AM UTC

DaiPlusPlus wrote: post #66

user5994461 wrote: post #59

Earlier quoted context omitted.

> $1m for a year's work? It's usually 4 years vesting. So obviously, it is NOT $1M for a year work.

Sorry, yes, it was to vest over 4 years, but extra stock would be added annually - so after 4 years my equity might be $4m cumulative, which is $1m/yr on average.

No you won't... unless you've got that in writing... and even there it's not guaranteed.

Companies say all kind of fake promises, don't trust them. Sadly, being laid off on your last month is a lesson of that ^^

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

#72

Post by stockoptionsta » Wed, Dec 21, 2016, 2:45 AM UTC

hesdeadjim wrote: post #36

it wouldn't be that expensive to buy them I hope you are taking into consideration the capital gains tax when it comes to the difference between strike price and the current fair market value of the stock. If a company is growing fast or takes on money, this can change alot in even a year. The IRS doesn't care that you may not be able to actually recognize that gain because you cannot actually sell the stock, it's co…

You're talking about AMT, right?

You're right, there are situations when people can't exercise their options simply because of the high tax bill.

In this particular case, with the company I'm talking about I am fairly certain (simply because I'm doing the same calculations for myself) that if he exercised his options it would not trigger AMT.

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

#73

Post by hesdeadjim » Wed, Dec 21, 2016, 3:13 AM UTC

stockoptionsta wrote: post #72

hesdeadjim wrote: post #36

it wouldn't be that expensive to buy them I hope you are taking into consideration the capital gains tax when it comes to the difference between strike price and the current fair market value of the stock. If a company is growing fast or takes on money, this can change alot in even a year. The IRS doesn't care that you may not be able to actually recognize that gain because you cannot actually sell the stock, it's co…

You're talking about AMT, right? You're right, there are situations when people can't exercise their options simply because of the high tax bill. In this particular case, with the company I'm talking about I am fairly certain (simply because I'm doing the same calculations for myself) that if he exercised his options it would not trigger AMT.

Only ISO options trigger AMT. NQSO triggers regular income tax on exercise for spread between strike price and FMV.

As far as I'm aware almost option grants are NQSO because ISOs have a bunch of other limitations that make them annoying or untenable depending on the grant size.

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

#74

Post by kasey_junk » Wed, Dec 21, 2016, 12:13 PM UTC

patio11 wrote: post #17

probably_wrong wrote: post #2

When 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…

> you will find many people willing to take yours off your hands at pennies on the dollar once that becomes feasible for your company

If this were true options would be a lot more valuable. But it turns out by the time a company gets to the point where there is any liquidity for their options, that company has probably passed the inflection point where you are past your 90% mark and it is obvious that it is so.

Due to the way option agreements are structured (right of first refusal, exercise time limits, etc) its virtually impossible to sell non-public options for employees who do not wait out a liquidity event (which is another downside to options that companies seem to discount too much).

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

#75

Post by emeritus » Wed, Dec 21, 2016, 3:00 PM UTC

skorgu wrote: post #65

teej wrote: post #62

Earlier quoted context omitted.

If you're working in the Bay Area and making average wage for a software developer, your marginal tax rate is going to be 28%+. If waiting 12 months means you can lower your tax burden to the long term capital gains rate of 15%, that's a no brainer.

AIUI, RSUs are treated as normal W-2 income when they vest.

Right. Your cost basis is the price at vesting, so it's the same as if you bought the stock at market with cash for the same price.

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

#76

Post by calcsam » Wed, Dec 21, 2016, 4:05 PM UTC

JonFish85 wrote: post #33

calcsam wrote: post #14

No, 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 so…

"I was an early engineer at Zenefits and found myself holding stock options seminars to explain this stuff to the rest of the engineers." This is a tricky position to be in, considering that in this sort of situation, you're generally explaining to people a small subset of the ways that they can get screwed. As much as it might seem nice to see people spending lots of time trying to figure out what their stock option…

The simplest heuristic to use is to assume the company exits at its latest valuation and do the calculations of what your options would be worth in that case.

Then, understand when your company could (at soonest) go public, given that growth rates will slow down at a rate around what comparable companies exhibit.

Obviously it's still a crapshoot, but this will give you a value for E(x) and timeframe.

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

#77

Post by gjem97 » Wed, Dec 21, 2016, 6:14 PM UTC

calcsam wrote: post #14

No, 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 so…

That's a really nice tool, well thought-out, and the calculations it does are spot on. However, I think it's based on one pretty big assumption: that the shares that investors buy are the same as the shares that you would get through your ISOs. They typically are not the same, with the investors getting preferred shares that are superior to your common shares. Furthermore, terms like liquidation preferences and "participation" can make the preferred shares much much more valuable in many types of liquidity events. So in all, I worry that this tool does more harm than good. Even given all the information you solicit from the user it is still very hard to say what the options/shares are worth. Typical errors in the estimate could be an order of magnitude or more.

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

#78

Post by logfromblammo » Wed, Dec 21, 2016, 7:02 PM UTC

smallnamespace wrote: post #29

logfromblammo wrote: post #26

Earlier quoted context omitted.

Even though anecdotally, I have made some money on option grants, I now see them as a symptom of cargo-cult management practices. A few weeks ago, a co-worker asked me for advice about a new (to us) employee stock purchase plan, and I basically said, "don't shit where you eat." Messing around with your employer's stock isn't a wonderful idea. Most people should just be blindly investing x% of their income in a robot-…

To play devil's advocate though, you are being provided more information than the external market would be by virtue of being an employee of a company, and also someone working in the industry, etc. Having more information at your disposal to evaluate a company means that option grant is worth more to you than to a random person on the street, which is why the company will pay you in options. It's better for the comp…

The only rational reason to work as an employee of a startup is for better job titles, working conditions, and professional development (from tougher challenges). Getting paid in lottery tickets is not sound investment strategy.

You may be a better informed investor if you pick the locks on the filing cabinets in the C-level offices after the bosses go home, and bug all the conference rooms, but it is unlikely that will make you better at estimating the future market value of the company, or at evaluating potential buyout scenarios. In any case, I never thought that spying on my bosses was a good idea. I just heard the lies, saw through the BS, and started sending out resumes. Or I got blindsided and started sending out resumes.

You should only work at a startup that will support the lifestyle you desire. If you were really critical to the company, you would have a contract and genuine equity, rather than being "at will" with a promise of options vesting later. Your primary concern should be "can the company continue to pay me for my work this month?", and your secondary concern "can they pay me next month?", and so on. As an employee, you are a replaceable worker-for-hire.

If you want to win big at the startup game, be a co-founder with undilutable equity. If you want to invest prudently as an employee, you can play the entire market rather than just one small, potentially volatile company, and a bigger cash paycheck makes that easier to do.

Employee option grants just seem like a con to make peon-level employees feel like they have more agency and more emotional connection with their employer than they actually do. The anecdotal success stories of option grants that actually pay off are necessary to keep the game going, just as state lotteries have to blow some money on oversized checks, balloons, and confetti whenever someone wins the jackpot.

The company's money does not come from a vacuum. No matter what amount of profit you get from an option grant, the company could have given it to you in a different, less complicated way. If you exercise 1000 options, and have to sell 500 of the shares to cover the exercise price, the company could have just granted you 500 shares directly, and still had 500 left to give out later. The hand-wavey sort-of-options are 100% there to benefit the company, and its owners, and their tax preparer, not you.

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

#79

Post by logfromblammo » Wed, Dec 21, 2016, 7:57 PM UTC

planteen wrote: post #55

logfromblammo wrote: post #26

Earlier quoted context omitted.

Even though anecdotally, I have made some money on option grants, I now see them as a symptom of cargo-cult management practices. A few weeks ago, a co-worker asked me for advice about a new (to us) employee stock purchase plan, and I basically said, "don't shit where you eat." Messing around with your employer's stock isn't a wonderful idea. Most people should just be blindly investing x% of their income in a robot-…

I agree with what you are saying about not having too many eggs in a basket. I have seen many variations on ESPP: 1) You can buy the stock at market value on some set date by paycheck deductions (but you avoid that commision!). Worthless, not work doing IMHO. 2) You contribute up to N% of your salary at M% discount on the stock. I would do this and sell immediatley. There was a small risk associated with that of a bi…

Last time I checked, the (US) tax rules stated that if you sold ESPP shares or exercised employee options grant shares before a year had elapsed, the gain was to be reported as ordinary income on your W-2 and taxed accordingly. So you might as well send 28% of the sale to the IRS immediately, to avoid trouble later on.

Anecdotally, I once sold some shares/options, so the same gain was reported in my W-2, again on the 1099 from the brokerage, and apparently one more time from my consumer bank when I transferred the funds from the brokerage using a printed check. The IRS said "Screw your return. We're changing it, because you had additional income you didn't report. Pay up, Buttercup." Well, that "additional income" was actually the same pile of cash, photographed at different times from three different angles. It took 10 years and way too many hours of writing FOIA requests and explanatory letters to sort out. The outcome was not what I would ever consider fair, but as I no longer need to fight it any more, I'm content to write off my losses as an educational expense.

Your experience with an ESPP is about 99% likely to be better than mine. But before you take the free peanut butter, take a quick look around for any levers connected to a gigantic spring. Poke it with an 11-foot pole a few times.

It's but one of the several reasons why I mentally model the US government as neckless slab of meat that is 7'6", 400#, and a crack shot with an infantry rifle, yet with the ethics of a 4-year-old toddler. At all times, stay out of its line-of-sight, and if you ever need to interact with it, you'd better bring it candy and flattery.

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

#80

Post by smallnamespace » Wed, Dec 21, 2016, 9:47 PM UTC

logfromblammo wrote: post #78

smallnamespace wrote: post #29

Earlier quoted context omitted.

To play devil's advocate though, you are being provided more information than the external market would be by virtue of being an employee of a company, and also someone working in the industry, etc. Having more information at your disposal to evaluate a company means that option grant is worth more to you than to a random person on the street, which is why the company will pay you in options. It's better for the comp…

The only rational reason to work as an employee of a startup is for better job titles, working conditions, and professional development (from tougher challenges). Getting paid in lottery tickets is not sound investment strategy. You may be a better informed investor if you pick the locks on the filing cabinets in the C-level offices after the bosses go home, and bug all the conference rooms, but it is unlikely that w…

> Getting paid in lottery tickets is _not_ sound investment strategy.

Anecdotally, I know someone personally who was an early employee at multiple startups at all IPO'd. Some of those IPOs happened years after he had already left.

He's now a millionaire many times over because he had the acumen to pick winners, and that's specifically what he was looking for when he made his choice on where to work. This is obviously not general investment advice, because you have to have an eye for picking winners. But he certainly recognized that 1) he had an opportunity to get equity for cheap and 2) he knew more than the general market and took full advantage of that fact. He even diversified by working somewhere until his options vested, then moving on, while not waiting for exit.

My point still holds: if you don't tolerate risk and want to get paid in cash, don't work at a startup.

Your moralizing and demonizing of startup compensation seems misplaced here -- the #1 biggest reason they pay in equity and options is because they are short on cash and long on equity. Founders spend a lot of time trying to raise cash from investors, so turning employees into de facto investors is a cheap and convenient solution.