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

#1

Post by stockoptionsta »

I work in a startup in San Francisco. We're profitable & growing, about 30 people now. I'm one of the first engineers so I have a good chunk of stock options.

A lot of times when I talk to my friends (mostly engineers, mostly in their middle 20s) about stock options they don't even know the basics.

A few examples from my life:

* A coworker left the company right before the end of his first year. He had ISOs, and it wouldn't be that expensive to buy them, but he still decided to leave right before the 1 year cliff date to go work in another company.

* A friend of mine did not sign his stock options paperwork when his employer gave it to him more than 1 year ago. I guess he was just lazy, didn't want to sign something he did not fully understand. I don't know all the details but I assume if he signs it now he loses 1 year of vesting, the grant price will be higher — just not the greatest decision / attitude imo.

* Another friend left the company where she had stock options, 6 months later she found out that the company was sold. She remembered about the stock options and asked me for advice. She did not know much about the topic so I told her roughly what her options were, told her about the 90-day rule. I later found out that she ended up getting some money from her past employer.

I know that there's a conversation [1][2] about changing some of the technicalities around stock options, but I think there might be an even bigger problem — many employees don't understand the basics of stock options, hence they don't value equity as much as employers / investors do.

Or is it just me and my friends?

1. http://blog.samaltman.com/employee-equity

2. http://blog.triplebyte.com/fixing-the-inequity-of-startup-equity

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

#2

Post by probably_wrong »

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 options work.

[1] https://news.ycombinator.com/item?id=10811570

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

#4

Post by mikestew »

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 number of ways a company can screw me out of a payday on options.

Point is, for the vast majority of people knowing or not knowing the first thing about stock options won't make a lick of difference in their bottom line. What people need to know about options: sign the paperwork when it's given to you, and on the outside chance the options end up being worth anything your coworkers will give you some half-assed advice, which is one's trigger to go talk to a financial advisor.

Otherwise, spend your mental energy on how to increase your 401K contribution. That's guaranteed to involve real money that you can benefit from, and you should bone up on maximizing the potential.

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

#5

Post by chimeracoder »

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 tipping point between "definitely worth it to exercise" and "definitely not worth it to exercise", so it's really important to understand them.

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

#6

Post by moonka »

There 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.

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

#7

Post by kafkaesq »

I think there might be an even bigger problem — many employees don't understand the basics of stock options, hence they don't value equity as much as employers / investors do.

That, and for the fact that their holdings percentage-wise are, in the vast majority of cases, typically negligible. Or even if they might potentially, in theory, be worth something, almost no one has time to investigate the company's business fundamentals to a sufficient degree to determine what chance they actually have of panning out, and hence, whether it's even remotely worth the risk.

Anyway, it's definitely not just you, it's a lot of people. The HN search engine (hn.algolia.com) is really quite good; in addition to the links others will be posting here, try some targeted keyword searches, and to read as many articles as you can on the subject. While they may not be all tailored to your specific situation, gradually the general subject will become less opaque.

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

#8

Post by pawelwentpawel »

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...

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

#9

Post by danpalmer »

We give basic details in our offer letters, are open about all the details, have an employee focused scheme (i.e. 10-year exercise window), and when we do the grant paperwork for new employees (we do it in batches because of all the government stuff involved, we're in the UK), we give those employees a talk on how it all works, set expectations, etc.

I think we're fairly good at this, and most people I've spoken to in the company know enough about it to not hit any of the issues above - i.e. their vesting schedule, strike price, exercise window, etc.

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

#10

Post by vmarsy »

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…

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 stocks.
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