+ Most new sparkly eyed employees who sacrificed cash pay for options are blissfully unaware of preferred shared.
This could keep slider at $0.00 for a longer (further on the right side).
TLDR Stock Options
31–40 of 213 posts
Re: TLDR Stock Options
#32Links don't appear to be working to https://captable.io or https://angel.co/clear/how_much
Thanks! I really appreciate you letting me know; it's fixed now :)
(For the curious, I added a click mask to the modal contents and forgot to update the links to fire anyway.)
Re: TLDR Stock Options
#33From a purely monetary and risk-based viewpoint, whether to join a start-up depends on how much money you already have.
Suppose you regard tldroptions.io's probability distributions and outcomes as correct, and the only thing you care about is maximizing the long-term rate of goal of your capital. Then the Kelly Criterion (https://en.wikipedia.org/wiki/Kelly_criterion , a.k.a. Fortune's Formula) says that you should try to maximize the geometric mean of your capital, which amounts to maximizing the expected logarithm of your capital.
To make this concrete, suppose you are choosing between two options:
- (Startup): Working at series C+ start-up for three years, where you receive 1% equity and $100k/yr salary, and have a 20% chance of getting ~$60 million in 3 years (according to tldroptions.io)
- (AmaGooFaceSoft): Working at AmaGooFaceSoft for three years, where you receive $300k/yr total comp (according to patio11)
For simplicity, I will ignore taxes and the time value of money. All monetary amounts below are in millions of dollars. If you have no money in the bank to start with, the geometric means of your alternatives after 3 years are:
- (Startup): exp(.2 log[60+0.3 ] + .8 log[0.3]) = $0.86 million
- (AmaGooFaceSoft) = $0.9 million
In this case, AmaGooFaceSoft is slightly better.
On the other hand, suppose you already have $1 million. After 3 years you will still have the $1 million, plus your salary and whatever money you get from your equity. Here the geometric means are:
- (Startup) exp(0.2 log[6+1+0.3] + .8 log[1 + 0.3]) = $2.8 million
- (AmaGooFaceSoft): 1+0.9 = $1.9 million
In this case, it's better to join the start-up.
The base salary matters a lot. If you have no money in the bank, but you get $150k year at the startup instead of $100k, then the geometric mean of the Startup option after 3 years is better than that of AmaGooFaceSoft:
- (Startup): exp(.2 log[60+0.45 ] + .8 log[0.45]) = $1.2 million
Re: TLDR Stock Options
#34I have a bunch of options in my company, but I don't know what the total number outstanding are, so I have no idea what percentage of the company I own.
1) Is this a common scenario?
2) Is there a way I can find out what the total number outstanding are?
Re: TLDR Stock Options
#35There's also another result: negative!
You could owe taxes on money you never saw. Under the AMT rules, if you exercise options at a discounted price, you have to consider the discount as "income". If several years later, when you're ready to sell and the stock is below what you paid for it, you'll still owe the taxes on your discounted price.
Ask your tax person for the details before engaging in any stock option purchase.
Re: TLDR Stock Options
#36I have a bunch of options in my company, but I don't know what the total number outstanding are, so I have no idea what percentage of the company I own. 1) Is this a common scenario? 2) Is there a way I can find out what the total number outstanding are?
If you ask the company should tell you what the "the total shares outstanding on a fully-diluted basis" is. If they don't tell you when you ask it's cause for concern; otherwise there isn't a way to tell what your compensation might be worth.
Re: TLDR Stock Options
#37From a purely monetary and risk-based viewpoint, whether to join a start-up depends on how much money you already have. Suppose you regard tldroptions.io's probability distributions and outcomes as correct, and the only thing you care about is maximizing the long-term rate of goal of your capital. Then the Kelly Criterion ( https://en.wikipedia.org/wiki/Kelly_criterion , a.k.a. Fortune's Formula) says that you should…
1% equity in a series C startup sounds wildly optimistic. You would most likely not get that much equity as a senior software engineer. It's interesting that your first calculation still favours the other choice.
Re: TLDR Stock Options
#38A QA engineer loads up a webpage and orders 0.1 percent of a company. Then 1%. Then back to 0.1%. Then clicks the down arrow -- ah, zero percent. Then clicks the down arrow again. Negative numbers ensue. True story, except I'm not usually a QA engineer.
Ah, the glories of default html input behavior!
Re: TLDR Stock Options
#39Yep, IMO unless you are a founder, if your company isn't one of the top companies of the decade your 4-6 years of pay-cut toil as an early employee will likely just not be worth it, at all.
The expected value of working at an early startup gets overestimated, by a lot. If you're optimizing your career, either make the most you can at an established company, or start a startup.
Or... work at an enlightened startup, that understands the state of affairs, and offers really generous lifestyle advantages - i.e. go work remotely for a couple months if you want, otherwise they are just exploiting misinformed young people and their founders likely have some ego issues.
Re: TLDR Stock Options
#40This is fantastically useful both as a side-of-the-barn estimator, and a teaching tool. Thanks! Two things a lot of startup employees are unaware of that are worth highlighting: they actually have to buy their options, which eats into returns, and that if they leave the company they have a limited window (30 days, typically) in which to do so. In would behoove them to save/plan for this fact.
Thanks! I really appreciate the feedback. The price of the options eating into returns is reflected in the number we present (we assume a consistent valuation growth by stage and at exit), but taxes aren't and those can 40%+ in the US, which people don't necessarily expect. Limited exercise windows are one of the things we have in the list of ways this can go horribly wrong, but you are right that it is something tha…
Early exercise / 83(b) has another benefit that most people aren't aware of -- if the exit is at least 5 years out, you can exclude 100% of your gain from federal cap gains tax under IRS Section 1202.
See here for more: https://blog.wealthfront.com/qualified-small-business-stock-...