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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?

#61

Post by user5994461 »

tptacek wrote: post #48
DaiPlusPlus wrote: post #45

Earlier quoted context omitted.

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.

I've done the other way around. Leaving before 1 year and not giving a f* about options.

Even if the company makes it big later (hundreds millions), a diluted infinitesimal percentage is peanuts compared to a better offer right now.

By the way, totally used the imaginary lost-stock as leverage in the negotiation. That was probably the best way to cash it out. :D

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

#62

Post by teej »

emeritus wrote: post #30
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…

> 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…

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.

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

#63

Post by icedchai »

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've never met an entrepreneur who didn't expect their company to grow to a huge valuation. Did you believe them? Your 1% would probably be diluted down to 0.25%... maybe less... by the time they hit that valuation. Factor in the salary you possibly gave up. Factor in the taxes. Factor in the odds of even having a liquidity event. Your expected return is a lot less than $1M.

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

#64

Post by DaiPlusPlus »

planteen wrote: post #54
DaiPlusPlus wrote: post #45

Earlier quoted context omitted.

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-…

Ouch. Did they reach $100MM valuation or were they below that?

They're still in submarine mode, though with fewer employees there now than when I was there. They have enough VC funding to last them a couple of years of zero revenue, though a friend of mine who is still there says they've secured a couple of high-profile business deals. That's all I know.

The founder has a good track record - though I think he's looking to sell it before it gets that big. My friend there thinks whatever stock options he has will simply be diluted by equity sales during future investment rounds anyway.

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

#65

Post by skorgu »

teej wrote: post #62
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…

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.

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

#66

Post by DaiPlusPlus »

user5994461 wrote: post #59
DaiPlusPlus wrote: post #45

Earlier quoted context omitted.

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-…

> $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.

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

#67

Post by DaiPlusPlus »

user5994461 wrote: post #61
tptacek wrote: post #48

Earlier quoted context omitted.

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.

I've done the other way around. Leaving before 1 year and not giving a f * about options. Even if the company makes it big later (hundreds millions), a diluted infinitesimal percentage is peanuts compared to a better offer right now. By the way, totally used the imaginary lost-stock as leverage in the negotiation. That was probably the best way to cash it out. :D

When seeking unvested equity matching, what kind of evidence does the hiring company typically seek to verify your request - or do they just take you by your word?

I wonder if I could apply to Google or Facebook and claim I have $2m of unvested equity from an unnamed startup...

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

#68

Post by marssaxman »

pfarnsworth wrote: post #42

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…

One could also see this as a large-scale demonstration that employees, in general, disagree with your assertion that stock is an important value of Silicon Valley life. It's important to founders/CXX types and venture capitalists, sure, but so far as I can see it is rarely useful for everyday workers to pay attention to their stock packages, because they are usually worthless, and opportunities to make a decision that has a meaningful impact on their value are very rare.

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

#69

Post by DaiPlusPlus »

planteen wrote: post #12

Keep in mind when you say "stock options," it can mean different things. The first thing that comes to my mind when you say "stock options" is options trading on publicly traded companies. That is buying and/or selling contracts of puts and/or calls. The second is "stock options" at private companies as compensation, which is what you are referring to. There are many variations on how this works. I've seen companies,…

So is that why companies issue options instead of direct equity because it spares the employees the hassle of dealing with actual ownership issues (K-1s, additional taxes, etc)?

The problem with looking at just salary is that salaries all tend to cap out (in my area, Seattle, you'll be hard pressed to find anything above $160k, when you get to that point compensation really starts to skew in favour of equity - especially as RSUs or Options - sometimes an order of magnitude greater than salary (e.g. "Partner"-level rank at Microsoft is easily $1m/yr in RSUs, but only about $200k/yr in salary.

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

#70

Post by user5994461 »

DaiPlusPlus wrote: post #67
user5994461 wrote: post #61

Earlier quoted context omitted.

I've done the other way around. Leaving before 1 year and not giving a f * about options. Even if the company makes it big later (hundreds millions), a diluted infinitesimal percentage is peanuts compared to a better offer right now. By the way, totally used the imaginary lost-stock as leverage in the negotiation. That was probably the best way to cash it out. :D

When seeking unvested equity matching, what kind of evidence does the hiring company typically seek to verify your request - or do they just take you by your word? I wonder if I could apply to Google or Facebook and claim I have $2m of unvested equity from an unnamed startup...

Noone verifies anything. It's the usual dance where you say what it will take for you to join them and they ask your current salary.

Should be part of that conversation: The £10k of stocks you'll loose when joining them [low minimum, at current valuation].

It was named startup (that noone knows). It was featured in various news as a top X startups to watch in the UK.

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