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Options vs. Cash

danluu.com

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Re: Options vs. Cash

#11

Post by lostcolony »

rguzman wrote: post #5

i 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…

Given what you know about Bitcoin now, would you buy $100k worth of bitcoin in 2010? Of course you would.

Except...I didn't tell you that your investment would be held by Mt. Gox. You lost your investment.

There is always risk. Always. 97% of startups fail. They are extremely high risk. The earlier you buy in, the higher the potential payout, but the more likely you are to be backing one that will fail. Even the successful ones, after dilution, may or may not be worth more than the cash over how long it took to IPO/be bought out.

You say you get to make risky investments with time; yes...but that's even worse than money. Money is fungible. Time isn't. You have a set amount in life.

Having a 97% chance you're wasting it (actually, higher, since dilution + etc means even a 'success' may mean you made less than the equivalent cash over how long you worked at the place, the extra hours you put in compared to working on side projects, etc) are some pretty long odds.

Re: Options vs. Cash

#13

Post by [deleted] »

rguzman wrote: post #5

i 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…

[deleted]

Re: Options vs. Cash

#14

Post by analyst74 »

gleb wrote: post #8

Paying 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…

> Paying 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

No that's not the same, options are basically the right to invest at current valuation. What you described is more like RSU.

Re: Options vs. Cash

#15

Post by martincmartin »

"...compensation package has a higher expected value..."

Expected value is a good measure when you're summing over lots of instances, e.g. if you're a VC fund investing in lots of startups.

As an employee, where you're working for a single startup at a time, robust statistics[1] suggests that the median is a better measure of what you'll expect to make: you have a 50/50 chance of making more/less than the median.

More than half of startups either fail, or don't succeed wildly enough for options to be worth more than the equivalent salary.

(If you work for 5 startups in your career, the best measure might be "sample 5 startups and sum the options payout to produce a value; repeat that many times and take the median of the result." But that's a lot harder to intuit, and is no doubt closer to the median than the expected value.)

[1] https://en.wikipedia.org/wiki/Robust_statistics

Re: Options vs. Cash

#16

Post by rguzman »

lostcolony wrote: post #11
rguzman wrote: post #5

i 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…

Given what you know about Bitcoin now, would you buy $100k worth of bitcoin in 2010? Of course you would. Except...I didn't tell you that your investment would be held by Mt. Gox. You lost your investment. There is always risk. Always. 97% of startups fail. They are extremely high risk. The earlier you buy in, the higher the potential payout, but the more likely you are to be backing one that will fail. Even the succ…

> You say you get to make risky investments with time; yes...but that's even worse than money. Money is fungible. Time isn't. You have a set amount in life.

that isn't an argument against startups offering options. that only says that you value your time in such a way that precludes you from investing it in startups.

Re: Options vs. Cash

#17

Post by jdavis703 »

martincmartin wrote: post #15

"...compensation package has a higher expected value..." Expected value is a good measure when you're summing over lots of instances, e.g. if you're a VC fund investing in lots of startups. As an employee, where you're working for a single startup at a time, robust statistics[1] suggests that the median is a better measure of what you'll expect to make: you have a 50/50 chance of making more/less than the median. Mor…

Why take the median? For me personally all I need is one year where I make a couple million bucks. What I really care about for my personal financial position is either the sum or mean, because that's what hits my bank account.

Re: Options vs. Cash

#18

Post by [deleted] »

rguzman wrote: post #10
SonicSoul wrote: post #7

Earlier quoted context omitted.

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…

[deleted]

Re: Options vs. Cash

#19

Post by asah »

I know 100+ people from a dozen companies who've made $1mm+ on equity. None of my friends would write a post like this.

That said, valuing equity is complicated:

- most offers include a healthy mix of cash and equity and benefits. Evaluate the whole package.

- unless you can pre-exercise via 83(b), I generally avoid options. RSUs are fine and many companies are offering them. Clever hack: counter the offer with a demand that the company pay 2% of the cost of exercising for each month you're employed, grossed up for taxes.

- watch out for illiquidity: whales often delay IPO which locks up employees. This compounds the exercise issue. Clever hack: counter the offer with a requirement that the company offer to buy back the equity at the most recent preferred share price, if the company accepts investment at a valuation exceeding $100mm.

Stay positive!

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