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Options vs. Cash

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Re: Options vs. Cash

#171

Post by bertjk »

mercutio2 wrote: post #127
susw wrote: post #106

Earlier quoted context omitted.

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…

A senior high performer[0] at a public BigCo can relatively easily make (in total comp) 2x-3x the cash compensation of someone working for a startup. So if you’re the sort if person who’s likely to work hard at a BigCO long enough for most of your rolling RSU grants to vest, then yes, the comp difference is that big. [0] note that MANY senior people at BigCos are NOT high performers. So beware of comparing to things…

This is true, though I would also add "high performer" does not just refer to your primary job function, but also the secondary job of playing BigCO's internal political games.

Re: Options vs. Cash

#172

Post by scatters »

shaftway wrote: post #153
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.

I need you to ELI5 this for me. Let's say today I own 200 out of 10,000 shares (2%) of a company. Someone comes in and says we want to own 25% of your company and are willing to pay $100M for it. At that point (before any transactions happen) I assume that my company is worth ~$400M, and my shares are worth ~$8M ($400M * 0.02). So the majority shareholders agree to the deal and dilute stock accordingly. Now there are…

The new investor is willing to pay $100M for 25% of the company. That means they think the company will be worth $400M after they invest $100M. That means the current value of the company is ~$300M, not ~$400M.

Re: Options vs. Cash

#173

Post by flanbiscuit »

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…

Just looking through the replies to your comment makes me throw up my hands in confusion and frustration. You say one thing, the next person argues against one point, then someone counter-argues, and so on. It's all a confusing mess. It's like you need a financial rep to be with you at job interviews to understand all this stuff.

Re: Options vs. Cash

#174

Post by libertymcateer »

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…

Did you ever engage a lawyer to review your option documentation?

Re: Options vs. Cash

#175

Post by jboggan »

blennon wrote: post #162
code4tee wrote: post #137

Cash is nearly always better for the employee. Startups like options because: 1. They can "pay" people with "free" pieces of paper that effectively cost nothing from a cash standpoint 2. It helps keep staff onboard by slapping golden handcuffs on 3. In the event that these paper options turn into something with actual value that only happens if the founders and investors make a ton of money first, so at that point th…

Startups also like options because they believe it creates an "ownership mentality" among its employees. I believe this is mostly true. I think equity compensation is also a selection mechanism. If I'm running an early stage startup, I want everyone to have a stake in the game. Equity compensation attracts employees with that mindset. Conversely, if a potential employee would prefer all cash compensation to equity, t…

More than cumbersome to set up, they are extremely cumbersome to amend.

Re: Options vs. Cash

#176

Post by nemo44x »

imh wrote: post #170
nemo44x wrote: post #119

Earlier quoted context omitted.

Options are not taxed until you exercise them. At that point they become an asset that contains "value" but until you exercise the option to purchase stock it is simply only the right but not the obligation to purchase stock at a particular price. When issued options you don't have to exercise them and if you don't you do not pay taxes until you decide to. Often companies offer the ability to "early exercise" options…

>Options are not taxed until you exercise them. At that point they become an asset that contains "value"... The assertion that they then contain value is the contentious point. To the IRS it is defined to have value. To me, it has no more value than the option, because there's no more market for those shares than there is for the options themselves. "Fair market value" is weird when there's no market.

Hence why I said "value" and not value.

Re: Options vs. Cash

#177

Post by ant6n »

mrajcok wrote: post #88
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…

What's a " 51% recourse promissory note"?

Re: Options vs. Cash

#178

Post by allsunny »

This isn’t my unique thought, I read it somewhere on the internet at some point where it was put much more eloquently, but it makes sense intuitively: The idea is that if you do enough start-ups, one (or if you’re lucky, more) of them will “hit.” I’ve been to a few rodeos at this point in my career. I’ve had one minor hit, and one big hit. It certainly worked better for me than if I’d worked for just cash. YMMV, but I will say not all start-ups are created equal. Sniff out the finances and product viability as much as you can before you join. I like the lottery ticket analogy because it’s true that you’re gambling a bit, I don’t like the analogy because the odds are nowhere even close to the same.

Re: Options vs. Cash

#179

Post by _cbsz »

sillysaurus3 wrote: post #147
Swizec wrote: post #140

Earlier quoted context omitted.

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 f…

> 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 feel like at least a phone call to a bank would be in order at that point. If it's that simple, surely some sort of mutually agreeable loan could be worked out.

Re: Options vs. Cash

#180

Post by pascalxus »

blennon wrote: post #162
code4tee wrote: post #137

Cash is nearly always better for the employee. Startups like options because: 1. They can "pay" people with "free" pieces of paper that effectively cost nothing from a cash standpoint 2. It helps keep staff onboard by slapping golden handcuffs on 3. In the event that these paper options turn into something with actual value that only happens if the founders and investors make a ton of money first, so at that point th…

Startups also like options because they believe it creates an "ownership mentality" among its employees. I believe this is mostly true. I think equity compensation is also a selection mechanism. If I'm running an early stage startup, I want everyone to have a stake in the game. Equity compensation attracts employees with that mindset. Conversely, if a potential employee would prefer all cash compensation to equity, t…

Employees should have ownership over the responsibilities of their jobs, anything more is just altruism.

When a company or overly aggressive recruiter tries to sell me options, that aren't worth anything yet, like it's a billion dollar lottery ticket, that's a big Red flag for me. It says something about the culture of the company.

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