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Who pays when startup employees keep their equity?

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Re: Who pays when startup employees keep their equity?

#61

Post by rdtsc »

shon wrote: post #31

It's interesting to see the popular response to this thread being one where people think employees are better off with salary over options. This seems crazy to me as I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash), start companies, become investors and/or take long sabbaticals with the proceeds from their options. With salary…

> I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash)

I have watched friends get paid a smaller salary, hoping for a great exit only to find their options diluated or the company just simply failing.

Now you probably only have lucky and successful friends or that friends who didn't get enough cash to buy a house are probably not in the back of your mind, as nobody wants to advertise either their failure or failure of their friends.

It just get chucked to "oh well, startups are risky". But then the winner get famous and everyone talks about them, making it seem like joining a startup and accepting options instead of a good salary is a sure way to succeed.

Notice, this is the same process the lottery system uses. We make fun of those people, but it is the same idea. Lottery always havily publicizes their winners, that is not just random marketing but a very useful tactic -- make everyone believe they can win took -- "Look at him, they got a huge giant check, so can you". If they televised ever single lottery loser, nobody would buy the tickets.

Re: Who pays when startup employees keep their equity?

#62

Post by cloudjacker »

Its not "options" vs "RSUs"

There are a wide range of financial products used around the world that would better fix the tech sectors compensation incentives and nobody is talking about them.

Think different didn't mean argue about false dichotomies.

It is a total charade for the venture firms to propel the notion that they are doing employees a favor by even offering stock. "How gracious of us to dilute our investment at all!"

Dilute the preferred shares with 8% dividend and liquidity preferences!

Offer convertible bonds or other hybrid products!

You can incentivize people in 101 ways, and you guys are debating about two of them under the assumption that the crowd is right

Re: Who pays when startup employees keep their equity?

#63

Post by tibbon »

conistonwater wrote: post #50
shon wrote: post #31

It's interesting to see the popular response to this thread being one where people think employees are better off with salary over options. This seems crazy to me as I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash), start companies, become investors and/or take long sabbaticals with the proceeds from their options. With salary…

Having a significant portion of your portfolio in options on one company, which also happens to be the company you work for, is overconcentrated. The usual (good) advice is that people should diversify their portfolio, and believing in your company is not a good reason to not do that. Maybe it'd help to think about it in reverse: if you had all your money in cash, would you then buy all those options in your company…

Would perhaps the best advice there to be exercise your options at every company you work at for all that you're vested for?

If you worked for 5 companies in 10 years, then you've got 50% of your options (likely) at each of those companies. Seems a decent-ish diversity.

Re: Who pays when startup employees keep their equity?

#64

Post by shon »

thisone wrote: post #38
shon wrote: post #31

It's interesting to see the popular response to this thread being one where people think employees are better off with salary over options. This seems crazy to me as I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash), start companies, become investors and/or take long sabbaticals with the proceeds from their options. With salary…

you've had no close friends who've lost their options, or had their options become worthless when companies fail? You're one lucky person to know!

Of course I have seen people lose. I've personally lost on options as well. I didn't make the assertion that you can't lose. With options, you are betting that the company will not fail and that it will become much more valuable. Both are statistically unlikely. You are also betting that you won't leave or be otherwise eliminated before the exit.

Mainly I'm framing this in comparison to additional salary which is also unlikely to generate significant wealth unless you are very good or very lucky (Probobally both) at managing your money.

Re: Who pays when startup employees keep their equity?

#65

Post by timcederman »

home_boi wrote: post #37
timcederman wrote: post #26

There is a downside to RSUs. Say you work for a private company with a high valuation, e.g. AirBnB at $25B, and you are granted 0.01% equity over 4 years. That means you are vesting $2.5m of RSUs over 4 years, and these RSUs are taxable at that amount. Typically for folks earning over $150k/year in base salary, particularly if married, even half as much will put you into AMT territory, and you will end up paying a si…

Does the government take private RSU's as payment for taxes? It seems unfair to tax people for equity that even the government itself doesn't value.

Yes, typically there is withholding to help cover the taxes, but for four year grants in the range of $1m+, the default withholding doesn't fully cover the taxes.

Re: Who pays when startup employees keep their equity?

#66

Post by sheepleherd »

landryraccoon wrote: post #48
bradleyjg wrote: post #42

Earlier quoted context omitted.

Going the cash route has a higher expected value but a lower variance. Different people have different attitudes towards risk.

I think you mean lower expected value, no? The way you put it cash is strictly better in every way than options - both higher expectation and lower risk. According to you there's no upside to options relative to cash.

you are correct to point out the "flaw" in what s/he said.

I don't know the actual answer (and it would be difficult to convince me that anybody has all the data either) but many people "experienced" with startups believe that so many more options come out worthless that cash is strictly better, better expected return at lower risk.

however, in the same way that the freakonomics guys explain people playing state lotteries even thought they are "not worth it": state lotteries (and startups) offer some of the few chances that most people have to actually get rich, so even though they don't pay off on average, they are "the only way" and "worth it" to some people. Not claiming that these people have clear ideas about either expected values or risks involved, but they have clear ideas that "it's the only way". For workers at many skill levels, they may have a sense that in their industry they won't be too much worse off in the long run so why not take a shot.

Re: Who pays when startup employees keep their equity?

#67

Post by jessaustin »

landryraccoon wrote: post #48
bradleyjg wrote: post #42

Earlier quoted context omitted.

Going the cash route has a higher expected value but a lower variance. Different people have different attitudes towards risk.

I think you mean lower expected value, no? The way you put it cash is strictly better in every way than options - both higher expectation and lower risk. According to you there's no upside to options relative to cash.

That's really a moot point, important only from a "risk neutral" standpoint. You've just discovered why risk-averse people don't work for startups.

Re: Who pays when startup employees keep their equity?

#68

Post by Retric »

shon wrote: post #31

It's interesting to see the popular response to this thread being one where people think employees are better off with salary over options. This seems crazy to me as I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash), start companies, become investors and/or take long sabbaticals with the proceeds from their options. With salary…

A single person making 100k+ has a ~90% chance of saving enough in 10 years to retire in a cheap location. That is a life changing amount of money.

Re: Who pays when startup employees keep their equity?

#69

Post by Retric »

landryraccoon wrote: post #48
bradleyjg wrote: post #42

Earlier quoted context omitted.

Going the cash route has a higher expected value but a lower variance. Different people have different attitudes towards risk.

I think you mean lower expected value, no? The way you put it cash is strictly better in every way than options - both higher expectation and lower risk. According to you there's no upside to options relative to cash.

Generally companies hand out options because their expected value is Less than cash. Put another way, they could also just hand out stock instead of stock options.

Re: Who pays when startup employees keep their equity?

#70

Post by rezlov »

rdtsc wrote: post #61
shon wrote: post #31

It's interesting to see the popular response to this thread being one where people think employees are better off with salary over options. This seems crazy to me as I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash), start companies, become investors and/or take long sabbaticals with the proceeds from their options. With salary…

> I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash) I have watched friends get paid a smaller salary, hoping for a great exit only to find their options diluated or the company just simply failing. Now you probably only have lucky and successful friends or that friends who didn't get enough cash to buy a house are probably not i…

That's the name of the game. You take a risk to make big money, and sometimes that risk doesn't pay off.
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