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Options vs. Cash

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Re: Options vs. Cash

#81

Post by mabbo »

gregmac wrote: post #71
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?

Most of the big post-IPO companies hand out stock on a regular basis as a bonus or a top-up to the actual pay.

The corp in question for me was Amazon. Around 1/3 of my pay (more some years) was in the form of AMZN stock that vested every six months. Stock, not Stock Options. No paying for it, no decisions, just boom, you now own X more stocks and how would you like to pay the income tax on that?

Re: Options vs. Cash

#82

Post by toomuchtodo »

gregmac wrote: post #71
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?

Possibly total comp. Statups are stingy with health insurance, while larger corps are more likely to pick up more of the tab (and occasionally, they'll pay your monthly premiums in full). This can easily add an additional $12k-24k to your total annual comp if you have a family.

Edit: US centric advice

Re: Options vs. Cash

#83

Post by dpark »

bm1362 wrote: post #79
jasode wrote: post #78

Earlier quoted context omitted.

>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?

Nothing so long as a small number of people own all the shares, they all agree to sell an equal portion, and the share price allows an equal portion from all owners.

Dilution makes all this simpler.

Re: Options vs. Cash

#84

Post by jonbarker »

In startups your risk is that 95% of the value of your labor goes into a pool of options whose underlying security (startup stock) never achieves any liquidity event. Also, you do have to factor into your analysis the fact that the tech giants also have options, which are likely not to expire worthless, and also have some upside as well, since they are listed on public exchanges. If startups thought more like Buffett "preferred holding period is forever" they would counterintuitively actually compensate employees with cash more competitively once they achieved positive cash flow (this actually seems to be occurring in a few companies, there are just too few positive cash flow startup examples for quality analysis on this front). More startup employees I know are actually just enjoying their work and salary instead of making a giant sacrifice on a longshot bet in exchange for work they don't think is sustainable. That being said I think what Bezos wrote about amazon's work ethic will always hold true "you can choose to work harder, longer, or smarter but in our case you can't choose 2 out of 3" - paraphrased from memory. Ultimately startups and big companies are trying to design compensation packages that create maximum productivity and the best description I've heard of this is to "take the issue of money off the table". Hard to do that with under market salaries and iffy stock options.

Re: Options vs. Cash

#85

Post by hinkley »

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…

Working at a startup as an employee with the expectation your gonna get rich is the game.

Think about the percentage of their investments that VCs expect will pay off. You could work for 15+ years at startups and never be at the successful one.

Re: Options vs. Cash

#86

Post by arjunrc »

jonbarker wrote: post #84

In startups your risk is that 95% of the value of your labor goes into a pool of options whose underlying security (startup stock) never achieves any liquidity event. Also, you do have to factor into your analysis the fact that the tech giants also have options, which are likely not to expire worthless, and also have some upside as well, since they are listed on public exchanges. If startups thought more like Buffett…

Do you have a link for the comment from Bezos?

It would be good to get some context on what he said.

Re: Options vs. Cash

#87

Post by joncrocks »

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…

Sure, but dilution without representation can be a big risk for a regular employee. You might get a smaller slice of a bigger pie, but it may also represents a smaller real-world valuation if you get diluted too far.

If you have no say over how much you're diluted (like most employees), you could be diluted away to nothing. You have no control. So you must calculate worth accordingly.

Is everyone to get diluted equally. No? Well then, calculate worth accordingly.

In addition, I thought the pie getting bigger was the WHOLE POINT OF HAVING THE SHARES TO BEGIN WITH.

Re: Options vs. Cash

#88

Post by mrajcok »

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…

Another option that I successfully negotiated for is purchasing shares outright at fair market value using a 51% recourse promissory note due in 10 years at the IRS minimum interest rate.

This avoids the exercise window and acquisition concerns, is pretty tax favorable, and largely aligns your treatment with the founders. It is a bit riskier even if the company agrees to offset the loan with bonuses over time, but at lower valuations I think it is worth considering.

In any case, it's worth it to have a good lawyer look over all your options paperwork to make sure you are getting a fair deal.

Re: Options vs. Cash

#89

Post by nathanstitt »

mikepurvis wrote: post #70
icedchai wrote: post #58

Earlier quoted context omitted.

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

At the moment that the dilution occurs, you're getting exactly the same size of piece, it's just a smaller proportion of a bigger pie. But I suppose the idea is that a bigger pie is able to expand larger and faster than it would have been otherwise.

Exactly! Thanks for pointing this out because everyone seems to miss it.

At the moment that an investment is made, a company should be worth just as much as it was before, but will have more liquid assets because it's traded equity for cash.

The question for employees and shareholders then becomes: "Do you believe management is capable of using the cash to build additional value, or will they waste it?"

Re: Options vs. Cash

#90

Post by PeterFBell »

harryh wrote: post #40
nissimk wrote: post #35

Earlier quoted context omitted.

If dilution is a non issue then why do professional venture investors demand anti dilution clauses?

Professional investors generally get pro rata rights which allows them to buy more stock in later rounds. They do this because they want the ability to buy more shares in companies that are succeeding. They don't get magic stock that magically doesn't get diluted.

They used to! Ask anyone who was involved in startups around 200-2002 about the full-ratchet anti-dilution provisions many investors demanded and received. Not fun for anyone else in a down round . . .
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