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Options vs. Cash

danluu.com

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Re: Options vs. Cash

#71

Post by gregmac »

mabbo wrote: post #66

Oh look, the thing I should have read before joining a startup. I left [large corporation], who had been paying me very well, to go try out the startup world. I found a cool local company doing something that sounded neat. I looked at the pay (better on a per-paycheck basis) and the options (better than the stock I was getting in the corporate world) and said "this is a great idea! If the startup succeeds, the option…

> I'm getting a bit more per paycheck, but on the whole I suspect my tax returns over the next few years will add up to less than I was making before, even if the startup succeeds.

That sounds counter-intuitive -- why would that be? Did you have some expense you could claim at [large corporation] that you can no longer claim?

Re: Options vs. Cash

#72

Post by dllthomas »

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…

> [T]hey don't actually make the company more valuable (what the company does with the money they raise does).

Yes they do. In two senses. The obvious one is probably not what you meant to refute - the total value of the company post raise is, in the simple case, the value of the company before the raise plus the value of the new cash. The company is more valuable. What I think you meant to say was that your shares don't get more valuable.

That's more true, but they can be. If the raise was a good idea, the company's prospects are improved (and therefore the value of existing shares) by whatever uncertainty existed about its ability to raise that funding.

Re: Options vs. Cash

#73

Post by rmah »

cynicalbastard wrote: post #45
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…

> That means everybody gets diluted including the founders, the angels, the VCs, and yes the employees too. founders, angels, and early round VCs can simply issue themselves more stock from the pool of unissued shares to counteract dilution.

No they can't. I don't doubt that this has happened before and I'm sure someone can dig up an example or two.

However, what you describe is highly questionable and borderline illegal. It's certainly grounds for a lawsuit by other shareholders (including options holders).

Re: Options vs. Cash

#74

Post by draw_down »

moron4hire wrote: post #60

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.

Well, kind of the whole idea is that maybe they will be worth more than the cash in the future.

Re: Options vs. Cash

#76

Post by BCNative »

Stock options are for kids too stupid to do the math, and young enough to make bad financial mistakes. Right around the time you hit 35 you need to remember Joe Pesci in Goodfellas.

Fuck you, pay me.

Re: Options vs. Cash

#77

Post by taejo »

htormey wrote: post #26

Working at a startup as an employee with the expectation your gonna get rich is a fools game. Negotiate for the best deal on options you can get (I.e quantity, terms like early excercise etc) but treat them as a lottery ticket. A startup is a good way to learn rapidly so focus more on the quality of the people you will be working with, technologies used, what your role will be, vcs backing it etc. In the long run the…

> Negotiate for the best deal on options you can get (I.e quantity, terms like early excercise etc) but treat them as a lottery ticket.

Sure, you can ask for a 100% non-dilutable share, but you're not going to get it. In order to negotiate meaningfully, you need to have a valuation of the things you're negotiating on, so you can decide what tradeoffs are good and which are bad.

Re: Options vs. Cash

#78

Post by jasode »

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…

>All things being equal, owning more % of a company == more money.

The point is all things are not equal. To restate a sibling comment, dilution means you own a smaller % of a more valuable company.

If it helps, think of "dilution == sell_equity". Dilution is the perspective of the sellers' side (x% - y%). Equity purchased is perspective of the buyer's side (investor's ownership goes from 0% to y%).

>To try to spin dilution in any other way is stretching the truth pretty far, and is rather manipulative IMHO.

Dilution explanation doesn't require "spin" nor mental trickery. It is the natural side effect of how companies sell equity to grow.

E.g. Larry Page's ownership of Google Inc got diluted from 50% in 1998 down to 16% in 2004. That smaller 16% was worth ~$3 billion around the time of the IPO[1]. If Larry insisted on "no dilution", no VC would invest money to help the search engine grow and therefore, he would own 50% of a worthless company.

So all things not being equal:

  50% of $0 = $0
  16% of $20 billion = ~$3 billion.
Obviously $3 billion is more money than $0. Thinking that 50% is better than 16% doesn't make sense for companies that require outside investors to grow. Similar story for Bill Gates' dilution, Jeff Bezos' dilution, etc.

Let's imagine Larry Page had a different conversation with Sequoia Capital to match this misunderstood fixation over "anti dilution"

>1998: Larry owns 50% + Sergei owns 50% = 100%

>1999: Sequoia: "we'd like to buy 10% of Google Inc for $12.5 million"

>Larry responds: "Yes! Great! We need your $12.5 investment but keep in mind that both Sergei and I have anti-dilution clauses so our ownership both stays at 50%."

> Sequoia responds, "So you want me to buy 0% of the company for $12.5 million? Uh, you guys are idiots"

Somebody in that imaginary conversation doesn't understand "dilution" or "equity" or simple math.

[1] http://www.nbcnews.com/id/5033780/ns/business-stocks_and_eco...

Re: Options vs. Cash

#79

Post by bm1362 »

jasode wrote: post #78
oillio wrote: post #56

Earlier quoted context omitted.

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…

>All things being equal, owning more % of a company == more money. The point is all things are not equal . To restate a sibling comment, dilution means you own a smaller % of a more valuable company. If it helps, think of "dilution == sell_equity". Dilution is the perspective of the sellers' side (x% - y%). Equity purchased is perspective of the buyer's side (investor's ownership goes from 0% to y%). >To try to spin…

Totally earnest question, as I'm a fool:

What is the difference between each selling _existing_ shares they own up to the $12.5M valuation and 'diluting' the existing shares?

Re: Options vs. Cash

#80

Post by hinkley »

sulam wrote: post #63
jdavis703 wrote: post #22

Earlier quoted context omitted.

Let's not forget the "asset only" acquisition where the company sells it's IP and employees but doesn't sell any shares. Been through one of these and this is what happened, screwing over former employees who had bought options and investors. I think the only people who profited were the bankers.

I've been on the other side of two of these and the explicit alternative in each case was bankruptcy. Also asset transfers are more expensive to the acquirer because you have to explicitly delineate the assets you're buying and what you're not buying. This makes for more lawyer time and pushes the transaction costs up significantly. The real reason to do it is because the team there at the time is more valuable as a…

Nothing I love more than being bought and sold like cattle.

Out of curiosity, how do you keep the employees from walking after an asset only transfer? The vague promise to them about future riches has already been broken. And you will up changing business practices that ruffle feathers (I'm not sure how you could avoid it. This stuff is rarely written down). Hell, you'll probably assign them to a new project anyway. So how do you keep them from leaving in droves?

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