10-Year Exercise Periods Make Sense

Valuing stock options at zero is one of those HN memes that are repeated endlessly, mostly, I suspect, by people not from Silicon Valley who know few, if any, engineers who got rich from stock options.

Just because stock options should be valued at less than a company's private valuation does not mean they are worth 0. Very few engineers actually value them at zero.

Adding on to this comment:

It's a spectrum, not a black and white your options are worth zero dictum. At one end, (extremely early stage startup, extreme, you join a company that everyone knows is going to go IPO within two years, and essentially earn what you would earn at Google or Facebook, maybe slightly more.

To give you one example, I knew someone that made about a million (vested over 4 years) in options by joining an already-successful startup as engineer ~70, that he believed would IPO within 4 years. On top of his market rate salary.

It's even worse when you consider AMT; sure, dropping $10k to buy your stock might be achievable, but if the FMV of those shares has gone up appreciable, you may find yourself in pain come tax day. (If your strike was $1/share, but the FMV is now $10/share, $9/share "gain" has to be considered as income for calculating your alternative minimum tax.)

Longer exercise window would be very valuable, especially for employees not having big cash pile laying around somewhere. That would raise the value of options a lot. The other suggestion though - longer vesting period - would have the reverse effect.

4 years vesting options in startup are "extremely risky investment that with much luck and hard work may pay off". 8 years vesting options in a startup means "I guess Las Vegas gambling is too boring and way to little risk for you? How would you like to gamble with 10 years of your life?"

4 years vesting options in an established company is "we'll pay you if you agree to suffer us and drag yourself to work long after it stopped being fun for you". 8 years vesting options in an established company is "for how much would you agree to sell us your immortal soul?"

In short, long period vesting for options may make total sense for company issuing it. It would have very low value for employee, and even long exercise period would not compensate for that.

Let's put it this way. When considering a job offer from a startup, people say, you should value the options component of the offer at $0. Well, people say that, but I think everybody knows that someone who wants to work at a startup isn't really going to take that advice. They may try to factor it in by somewhat reducing the importance they give the options, but if they're accepting a below-market salary, as most startup employees do, they must be at least a little bit caught up in the hope of the options being worth something significant. I think even I, after years in the industry and several failed startups, could get caught up in that again, if wooed by the right startup.

On the other hand, if I were told that the options would be worthless if I left before a liquidity event, then I definitely would value them at exactly $0, and would therefore insist on a market-value salary, period.

If you've already joined such a startup, and taken a below-market salary, that's a different situation. I think the best advice I could give you -- unless you totally love working there -- would be to find another job.

I think there is fundamental difference of opinion here, exposed by Adam's and A16Z's posts.

A fairly typical early stage employee will forgo hundreds of thousands of dollars in salary over a vesting period, in exchange for options.

The philosophical difference is here: At the end of that period, do you think of the shares as the employees, earned in exchange for both the work done in those years, and the hundreds of thousands the company saved on salary? Or do you think of the options as an ongoing incentive to keep the employee with you (perhaps still below market rates), in exchange for the chance of a big payout later?

Technical employees often feel the former, and will point to the fact that they've "given" the company much more in salary reduction than many early round investors paid per share they own outright. Corporations often state the latter point, or some variation, particularly pointing out that later employees don't have the same leverage on the option pool. Option agreements often encode the latter.