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Options vs. Cash

danluu.com

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Re: Options vs. Cash

#141

Post by s73ver »

susw wrote: post #106
cjbprime wrote: post #47

Earlier quoted context omitted.

> 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 t…

Public companies can issue stock grants too. They tend to be much more worthwhile, too, as you can actually sell them once they vest.

Re: Options vs. Cash

#142

Post by TheCoelacanth »

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.

Wouldn't another alternative be for the tax to be entirely when the underlying stock is sold?

Re: Options vs. Cash

#143

Post by erbo »

This shows why I've long said, "Put not your faith in stock options."

Like it or not, options are basically Monopoly money. You can't get your landlord to accept them, or the grocery store, or the credit card companies.

Re: Options vs. Cash

#145

Post by kgwgk »

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?

If the shareholders sell their shares the shareholders keep the money. If the company issues and sells new shares the company keeps the money.

Re: Options vs. Cash

#146

Post by nissimk »

sulam wrote: post #111
hinkley wrote: post #80

Earlier quoted context omitted.

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.…

Payouts! They get some mix of salary (comparable to existing employees), stock (more generous than existing employees) and a cash payout that's fairly generous if they meet some goals laid out in advance. And you didn't ask, but if not enough of the team accepts an offer, then it evaporates.

If I am to believe HBO, then sometimes those goals are drinking beers on the rooftop.

Re: Options vs. Cash

#147

Post by sillysaurus3 »

Swizec wrote: post #140
theptip wrote: post #120

Earlier quoted context omitted.

Right, but the only reason you'd take on any dilution as a founder is if you think the extra money will make your shares more valuable in the future.

The issue is that as an employee you don't have that choice. Somebody else makes those decisions for you, you're just along for the ride.

The VC-backed company model isn't set up for employees. The model is so that (a) founders can take risks (b) using money from VCs (c) where if the company does well, the founders and VCs both become richer.

Everything else follows from that. The fact that employees get any shares at all is just a way to get better employees so that the company does well. Only employees of unicorns have any chance of getting wealthy from stock, and you're unlikely to be an early employee of a unicorn.

It's better to view the situation in absolute terms rather than relative terms. Instead of comparing the outcomes of founders/VCs vs employees, compare an employee of a startup to an employee of non-startups. At not-startups, the working environment is very different. Some people enjoy that, some prefer the opposite. Also, getting +$100k (or +$50k, or even just +$10k) is still nice, even if the founders and VCs get 800x more.

The only part I have serious concerns about is the fact that you can end up underwater when it comes time to exercise your options, i.e. your tax bill outweighs whatever profits you'd see. I don't know exactly how this situation arises, but it happened to a friend. It was something like: he could have exercised his shares and gotten several hundred thousand, but he would've needed to pay about $100k in taxes beforehand. Since he didn't have that money, he couldn't exercise the options.

I might be wrong about the specifics, but there are situations similar to that, and it's pretty unnerving knowing that you can jump into a situation where your +$100k somehow turns into -$50k.

Re: Options vs. Cash

#148

Post by URSpider94 »

dpark wrote: post #83
bm1362 wrote: post #79

Earlier quoted context omitted.

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.

Also, selling shares would be a taxable transaction for the founders, whereas issuing more shares and selling those is a tax-neutral transaction.

Re: Options vs. Cash

#149

Post by s73ver »

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…

I don't think anyone could claim that employees get a better deal than the investors, ever.

Re: Options vs. Cash

#150

Post by sbob »

ares2012 wrote: post #133

I don't want to jump into a debate on a clearly biased post, but I feel that a few things need to be clear: - Many employees prefer options to cash, as it provides the opportunity to make a lot of money. The chances that happens are very low but many people want to take the chance. Just because it's not your preference doesn't mean it's not attractive. - Salaries increase over the life of the company, so if you join…

The lottery is just a way of taxing poor people who don't know math. (c) :)
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