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Options vs. Cash

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Re: Options vs. Cash

#51

Post by lostcolony »

rguzman wrote: post #16
lostcolony wrote: post #11

Earlier quoted context omitted.

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.

Sure, and I wasn't arguing against startups offering options. Just against startups valuing them over cash, and expecting employees to do the same.

Really, I'd say the whole thing is a red herring; either way you're working. Your time is being used. So the question is do you want to trade that time for a guaranteed amount of money, or a -possible- amount of money (but, high risk). The only way taking the options makes sense is if the salary is -still- high enough to not get in the way of what you want to do, and you could walk away having netted zero from your options and not feel cheated.

Re: Options vs. Cash

#52

Post by kabdib »

asah wrote: post #19

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 dem…

If you are "good" and do well in reviews, a company like Microsoft or Apple (from direct experience), or Facebook/Google/Adobe (I'm assuming, with a little data from people who have gone to these places) will do well by you, to the tune of millions.

Moving upward a little: Several of my ex cow-orkers at MS are now partners, and will be able to retire early and never have to work again, and they're in their late 30s and early 40s. Nice gig if you can get it; it's not always a meritocracy, but getting better.

If you want to make a million dollars from stock over 5 years (in addition to a competitive salary) it's easier to do this at a big company than it is at a startup.

Re: Options vs. Cash

#53

Post by walshemj »

analyst74 wrote: post #23
rileymat2 wrote: post #4

Earlier quoted context omitted.

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.

Right, with options you can choose not to exercise if valuation goes down, avoiding a loss.

With some options (Warrants of investment trusts for example) you can sell those on the open market if they are in the money its also a way of leveraging your investments.

Re: Options vs. Cash

#54

Post by arca_vorago »

i_dont_know_ wrote: post #6

I 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 a…

Do you know of a good resource that could bring a lay IT person up to speed on these kinds of nuanced details? To me it just seems lots of us just dont know about this stuff. I count myself lucky to have a paralegal SO who does it everyday and walks me through it, but most people don't have that.

Re: Options vs. Cash

#55

Post by martincmartin »

jdavis703 wrote: post #17
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.

Because you'll only work at a handful of startups in your lifetime. You will not make the sum / mean over all startups, only the ones you work at.

Re: Options vs. Cash

#56

Post by oillio »

jasode wrote: post #27
i_dont_know_ wrote: post #6

I 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 a…

>"yay, X% means I get X% of the company!" and then I found out the shares can be diluted. There seems to be a common misunderstanding about dilution. Dilution is not really the issue. In fact, dilution is a positive sign . It means more investors value the company and want to buy into the ownership. How do current owners who collectively own 100% of the shares "sell" more shares to future owners?!? By way of dilution…

I hear this argument a lot. Mostly from people trying to sell the idea of a highly dilutive funding round.

Sure, further rounds are a sign the company is doing well. The important word being "sign," they don't actually make the company more valuable (what the company does with the money they raise does). If you own a lot of stock, you probably already know if the company is doing well or not. In that respect, the round just puts a number on what you already know.

The math is simple. All things being equal, owning more % of a company == more money. To try to spin dilution in any other way is stretching the truth pretty far, and is rather manipulative IMHO.

Re: Options vs. Cash

#57

Post by sidlls »

hobbyjogger wrote: post #31
asah wrote: post #19

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 dem…

Unless you are a sought-after C-level executive, hardly any legitimate companies are going to even consider your "clever hacks." The first one blows up 409a (requires optionholder to pay fair market value for the shares). As to the second, very, very few investors are going to allow "their" money to be used for a common stock repurchase (at the same per share price) instead of going toward's the company's operations/…

Yes, but that's just another asymmetry in the market. Some (many, actually, as far as I can tell) of these "legitimate companies" care very deeply about lower status employees thinking highly of their "clever hacks" regarding equity as part of a compensation package.

$X salary plus y% options at a startup should almost always be viewed as a having a value of $X and no more than that, but these "legitimate companies" want employees to view it as $X + $Million(s) in a future (all but guaranteed!) windfall. There are exceptions, but these are rare.

I wouldn't take issue with these companies trying to pass their crappy "equity compensation" packages off as "legitimate" if there was more openness and honesty about its value and the status of the employees with respect to the company.

The only time anybody should value equity at > $0 is when it's part of a regular grant or purchase of shares with true, market recognized value (e.g. RSU grants, ESP plans in a public company).

Re: Options vs. Cash

#58

Post by icedchai »

oillio wrote: post #56
jasode wrote: post #27

Earlier quoted context omitted.

>"yay, X% means I get X% of the company!" and then I found out the shares can be diluted. There seems to be a common misunderstanding about dilution. Dilution is not really the issue. In fact, dilution is a positive sign . It means more investors value the company and want to buy into the ownership. How do current owners who collectively own 100% of the shares "sell" more shares to future owners?!? By way of dilution…

I hear this argument a lot. Mostly from people trying to sell the idea of a highly dilutive funding round. Sure, further rounds are a sign the company is doing well. The important word being "sign," they don't actually make the company more valuable (what the company does with the money they raise does). If you own a lot of stock, you probably already know if the company is doing well or not. In that respect, the rou…

Except, all things usually aren't equal. Most people explain dilution like this: you're getting a smaller piece of a bigger pie.

Re: Options vs. Cash

#60

Post by moron4hire »

You don't have to over-complicate the analysis. The fact that they give you the options instead of cash is proof the options are worth less than the cash. This is Econ 101: bad currency drives out good as good currency gets horded.
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