Options vs. Cash
danluu.com
Options vs. Cash
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Re: Options vs. Cash
#2This is an interesting way to flip the perspective, to ask why do startups think offers of options are enticing (as compared to just cash).
But for the potential employee, the advice remains the same; ignore the options when it comes to evaluating a compensation package (and only those who are informed enough to go "weeeeelll..." and have actual reasons for why in a ~particular~ instance they should do differently, should ever consider doing otherwise).
Re: Options vs. Cash
#3Options by definition are worthless when they are granted, because strike price is the current estimated value of the stock.
Re: Options vs. Cash
#4Options by definition are worthless when they are granted, because strike price is the current estimated value of the stock.
This is not true, the right to purchase at the current price but not the obligation has value in itself.
Of course this is no where near the sum of the strike price for the options.
Re: Options vs. Cash
#5i think options do a couple of things:
1) they let employees invest in startups using their time instead of their money, which is handy when you aren't rich and 2) they allow the company to have a legal framework around an IOU: take less salary now, bigger payout later maybe.
thought experiment: knowing everything you know about e.g. stripe right now, would you buy $100k worth of stripe back in ~2012? in 2012 it was a risky proposition to do so, but many people at the time understood why stripe was likely to be big and successful and invested money in it. i'd rather live in the world where there is a mechanism to invest in such a company besides being an accredited investor with access.
many people go wrong when thinking about options in that they don't try to consider the fundamentals of the investment. working at an early-stage startup isn't just a job, it is a way to do risky investments using your time.
all that said, what Dan proposes at the beginning makes a lot of sense: the startup should be willing to give you cash instead of options (provided they have the cash).
Re: Options vs. Cash
#6I started off once thinking "yay, X% means I get X% of the company!" and then I found out the shares can be diluted. Then I learned "non-dillutable".
Then I learned about vesting periods, windows for exercising options, and a whole slew of financial terms and devices; each one seemed to come with its own unique "gotcha" that, if you didn't know about, would cost you nearly everything.
Everyone I talk to about these always says "well, don't do that one thing, or if you do that one thing be sure you do it in this way and you're set". The cumulative knowledge you need becomes pretty high pretty quickly though, and the chances of me doing the right legal and financial incantation at the right moment becomes lower.
Nowadays I go with cash. I don't get 'golden handcuffs' that hold me to a job I don't like because it might pay off later. I can calculate the expected value and risks with cash without tons of research. I know my legal recourses if I get screwed out of cash.
Re: Options vs. Cash
#7i think options do a couple of things: 1) they let employees invest in startups using their time instead of their money, which is handy when you aren't rich and 2) they allow the company to have a legal framework around an IOU: take less salary now, bigger payout later maybe. thought experiment: knowing everything you know about e.g. stripe right now, would you buy $100k worth of stripe back in ~2012? in 2012 it was…
knowing everything you know about e.g. stripe right now, would you buy $100k worth of stripe back in ~2012?
sure but for every stripe there are 10 startups that either failed or didn't amount to a great payout.
I think the point this post is making that the value of options is statistically not greater than higher salary at a competitor, given the risk an employee takes since he can't diversify his time.
that said if you believe in an idea it is absolutely great to have the option to "go long" on that idea with your time
Re: Options vs. Cash
#8Paying with options is equivalent to the start up selling stock to investors, paying employee with cash, and then having employee invest the money back into the company. As the article points out.
But there are differences. Avoiding income tax. Deferral of compensation to drive retention. Giving employees a better deal than the investors. Letting employees invest into an asset class the government normally prohibits them from investing into. Those are some of the big ones.
Re: Options vs. Cash
#9i think options do a couple of things: 1) they let employees invest in startups using their time instead of their money, which is handy when you aren't rich and 2) they allow the company to have a legal framework around an IOU: take less salary now, bigger payout later maybe. thought experiment: knowing everything you know about e.g. stripe right now, would you buy $100k worth of stripe back in ~2012? in 2012 it was…
knowing everything you know about e.g. stripe right now, would you buy $100k worth of stripe back in ~2012? sure but for every stripe there are 10 startups that either failed or didn't amount to a great payout. I think the point this post is making that the value of options is statistically not greater than higher salary at a competitor, given the risk an employee takes since he can't diversify his time. that said if…
> for every stripe there are 10 startups
"10" is an understatement.
Re: Options vs. Cash
#10i think options do a couple of things: 1) they let employees invest in startups using their time instead of their money, which is handy when you aren't rich and 2) they allow the company to have a legal framework around an IOU: take less salary now, bigger payout later maybe. thought experiment: knowing everything you know about e.g. stripe right now, would you buy $100k worth of stripe back in ~2012? in 2012 it was…
knowing everything you know about e.g. stripe right now, would you buy $100k worth of stripe back in ~2012? sure but for every stripe there are 10 startups that either failed or didn't amount to a great payout. I think the point this post is making that the value of options is statistically not greater than higher salary at a competitor, given the risk an employee takes since he can't diversify his time. that said if…
> sure but for every stripe there are 10 startups that either failed or didn't amount to a great payout.
yep. it's probably more like 100:1 don't go work at the other 99! :)
i agree that the value of options is statistically not greater than the compensation package at GOOGBOOK. that said, you don't get to live 1000 lives in parallel. so, either you have to think very carefully about this one (or ~5) investments you are going to make OR you can go work at a bigger company with higher salary if that isn't for you.