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Options vs. Cash

danluu.com

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Re: Options vs. Cash

#101

Post by ep103 »

rmah wrote: post #73
cynicalbastard wrote: post #45

Earlier quoted context omitted.

> 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).

Eh, this is exactly what happened to a friend of mine. The rationale later, was he had been promised X percent, but when the final deal went through, they diluted different pools of company stock to different percentages, and his values went down to 1/10 what he was expecting.

I know I'm missing a lot of info, and its just a second hand example, but it seems in line with grand parent post's idea that for each type of financial tool, there's at least one gotcha you need to be aware of.

Re: Options vs. Cash

#102

Post by _0w8t »

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…

Google example is a bad one as most startups fail in practice within few years. Most likely one works in one of those, not at the next business success.

In a typical startup a dilution means that the company run out of initial investments and has no way to get some form of a loan. So selling the ownership is the only way to continue. And if they succeeded with that it would not make the company more valuable. It just meant that owners were good at convincing investors. This is orthogonal to future value of the company.

Re: Options vs. Cash

#103

Post by tristanho »

> If you look at companies that have made a lot of people rich, like Microsoft, Google, and Facebook, almost none of the employees who became rich had an instrumental role in the company’s success.

Is this true? Dan seems to kind of skim over this point without much proof or thought (which is unlike him!)

I don't have any data on this either, but it seems like a pretty big assumption to take for granted. The implication is that the early employees added little value compared to investors/founders, but in my experience this is the opposite. The team is literally who built the vast majority of the product.

Re: Options vs. Cash

#104

Post by gumby »

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…

> 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.

This doesn't just apply to company shares (a topic which causes people to not think rationally, for some reason).

It applies to a market. Sun's CEO MacNeilly famously said that he liked open systems (in the case of BSD Unix) because "it increases the pie. Our slice gets smaller but all these participants grow the overall pie faster, so our revenues go up."

What fascinated me at the time was how the business press was puzzled by his statement -- they had a more zero sum view of markets in the late 80s/early 90s. Nowadays people understand that the existence of Lyft helps Uber, and vice versa.

And the same is true with people who want to buy your shares.

Re: Options vs. Cash

#105

Post by bb88 »

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.

I think this would be the case where language makes a clearer understanding.

"You own 1% of the company" vs "You own 1% of the angel round stock pool."

I think it's clear(er) what the second sentence means.

Re: Options vs. Cash

#106

Post by susw »

cjbprime wrote: post #47
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…

> I know 100+ people from a dozen companies who've made $1mm+ on equity. None of my friends would write a post like this. This is addressed in the post: > Another common objection is something like “I know lots of people who’ve made $1m from startups”. Me too, but I also know lots of people who’ve made much more than that working at public companies. This post is about the relative value of compensation packages, not…

How different are startup salaries vs public company salaries? Is that $1m at Public Company the total salary over a certain period, or is it extra salary on top of the potential salary at Startup Company? The quote seems to say it is extra (relative).

If I am supposed to make $1m more at Public Company over -- say -- a 10 year period, then that means my salary at Public Company would have to be $100k more per year than at Startup Company. Is the difference between startup and public really that big?

Re: Options vs. Cash

#107

Post by pkolaczk »

analyst74 wrote: post #3

Options by definition are worthless when they are granted, because strike price is the current estimated value of the stock.

Strike price is estimated through 409a valuation, which is typically very conservative and considerably lower than the fair market value of the stock, which is frequently less than the evaluation made by investors.

Re: Options vs. Cash

#108

Post by zalebz »

wruza wrote: post #91
mikepurvis wrote: post #70

Earlier quoted context omitted.

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.

If you're getting exactly the same size of piece, why name it "per cent"?

you are getting the same amount of pie (your volume of food stays consistent) however the ratio of your piece vs the rest of the pie is what shrinks

Re: Options vs. Cash

#109

Post by walshemj »

richardwhiuk wrote: post #61
walshemj wrote: post #43

What strikes me as odd given the USA's reputation as the home of the self made millionaire that the taxation of employee options is so broken. Treating options on shares as Income when they are not is just stupid options are a high risk instrument that well be worth nothing as opposed to a higher sallery. Why is there not a PAC made up of tech industry employees lobbying for reform of Federal and state laws and argua…

The alternative is that the tax is entirely on exercise of the option.

surly on the liquidity event when you exercise the options with out selling you have not received any income or CGT yet.

What tax CGT or Income and in the UK an approved scheme is tax fee in effect - this is to encourage employees share ownership

Re: Options vs. Cash

#110

Post by EternalData »

Always good to break down how startup equity really works. It quickly becomes apparent that working at startups isn't a great cash game (though it is a decently good skills game).
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