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Options vs. Cash

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Re: Options vs. Cash

#181

Post by wolco »

asah wrote: post #128
nwenzel wrote: post #30

Earlier quoted context omitted.

I'm a founder at a high-growth startup in Mountain View. I always tell potential hires, "options are worth nothing until they're worth something. And, they may never be worth anything." I think that's the opposite of the unrealistic optimism job candidates get. But I think it also helps set the stage for a culture of transparency and honesty very early. Even before that person becomes an employee. I'm curios to know…

Taken literally, this implies comparing offers strictly on cash+benefits, which typically skews things in favor of large companies.

Benefits could mean other things.

Many of us will take less money for remote options or more say in product development.

At my last company I left a few months before they sold. Been wondering if I made a mistake not buying my options. I was finally able to get the final selling price. It was half price per stock than the options were valued at. Looking back I made the right choice even thought it feels like I missed an opportunity.

Re: Options vs. Cash

#182

Post by askafriend »

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

The problem I see with this particular line is how disproportionate it is. If you had said 100+ people from 50+ companies, that might have been more convincing than 100+ people from a select 12 companies.

The problem here is that it's 12 companies, and not every company can be one of those 12. That's like me saying I know 20+ people from 2+ companies that made $1mm+ but those 2+ companies included FB/Twitter/etc.

Re: Options vs. Cash

#183

Post by ThrustVectoring »

pmontra wrote: post #163

I've been asked today if I'd take equity instead of some cash. My answer was a polite no. If I could work at the same time for ten startups then I would hedge the risk. Most would fail, one would succeed, it could be worth it. But I can work for only one startup so it's like betting on who would win 2018 NFL. There are better choices than others, still it's down to luck.

Would it be possible for workers to create a diversified pool of startup equity grants? You'd pay in in-kind, and receive a portion of all cash flows from group holdings proportional to what you put in.

There's obvious problems with how to fairly value the in-kind options, and how to avoid making it a market for lemons.

The overall goal is something like if there's 11 co-founders and one makes it big, you wind up with one person with $900M and ten worth $10M, rather than one worth $1B. It's a small enough portion of equity that you're still incentivized to make it big, and a big enough portion of enough equity slices to cut out a lot of the variance.

Re: Options vs. Cash

#184

Post by kbenson »

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…

> it's pretty unnerving knowing that you can jump into a situation where your +$100k somehow turns into -$50k.

But even your example wasn't that. Your examples was -100k and +300k (or more), but offset by time slightly. That's still a very large net positive, just gated by a period of net negative.

I suspect there are some details that you are missing as to the situation of your friend. I know little about investment vehicles, but I've filed taxes at one point and paid them at a later point many times. For income taxes the rules for this are clear, and the amount you pay in fees and interest is also very clear. For some investment vehicle, I would bet if there's some taxes that need to be paid prior they have automated processes set up to pay them for you and take the amount out of the later payout, for a fee. If not, I can't imagine getting a short term loan for that would be too hard, even if you have to use private money (a real investor, or even just a friend).

Re: Options vs. Cash

#185

Post by ThrustVectoring »

All I want from the equity package at a start-up is for it to be non-zero. If a co-worker winds up with enough out of their equity package to become financially independent, I'm going to be very upset unless I've at least gotten enough for a car or vacation.

Re: Options vs. Cash

#186

Post by justin_vanw »

For one thing, the reason that options/shares aren't traded widely in earlier stage companies is regulatory. If you have too many investors, or something, you have more regulatory overhead to deal with. Small companies don't want to have 5000 investors for this reason. However, I personally know people who have sold their vested options at a significant profit in very early startups (just after an A round).

Options are worth more than cash IF AND ONLY IF you have insights and evidence that the company is going to outperform the current valuation of the company, after being adjusted for risk.

For example, if you see that it is the best team ever assembled. Most startup CEOs says their team is the best ever, but if you interact with the team for a bit and see it is probably true.

For example, if the company needs you really badly, and they are able to give you options based on a valuation that based on current information is a huge underestimate. For example, a drug company that found out yesterday that they got their FDA approval for their new blockbuster drug, and for some reason they need to hire you very badly. This is iffy because they are probably not able to offer any options if they are already far along on being acquired.

Overall, there are certainly startups where the signals would be available to someone thinking of working there such that they would be able to determine if it is likely that options have a promising expected value. I think this is going to be a very low % of startups where that expected value is even remotely close to what you would get at a large company, and very very few where it would be much higher.

Re: Options vs. Cash

#187

Post by kbenson »

joncrocks wrote: post #87
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…

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 equal…

> Sure, but dilution without representation can be a big risk for a regular employee.

Well, it's a big risk to everyone that doesn't get voting rights, right? Not all investors get voting rights, do they?

In some way, an employee sits between a non-voting investor and a voting investor. They don't get to vote, but they do have some control over the outcome of the company (ranging from small to large, depending on the number of employees and responsibilities of the person in question).

Re: Options vs. Cash

#188

Post by jethro_tell »

bertjk wrote: post #171
mercutio2 wrote: post #127

Earlier quoted context omitted.

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.

small companies have internal politics as well. It's not like working with people disappears. I've worked at both big and small companies, I don't really have a preference but in a big company, you can move around and keep all the good stuff if it gets a little hot under the collar. With a small company lots of times you have to leave to get a new manager or role or move up or just get a change of pace.

The continuity of a big co. can be very helpful from a salary perspective.

Re: Options vs. Cash

#189

Post by sillysaurus3 »

kbenson wrote: post #184
sillysaurus3 wrote: post #147

Earlier quoted context omitted.

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…

> it's pretty unnerving knowing that you can jump into a situation where your +$100k somehow turns into -$50k. But even your example wasn't that. Your examples was -100k and +300k (or more), but offset by time slightly. That's still a very large net positive, just gated by a period of net negative. I suspect there are some details that you are missing as to the situation of your friend. I know little about investment…

Yeah, I'm certain I got some of the details wrong. It sounded like a situation similar to https://news.ycombinator.com/item?id=14464184 where you can owe taxes on money you never saw.

Re: Options vs. Cash

#190

Post by mnglkhn2 »

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…

> 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.

Does this mean that stock options are not a measure of risk taken by the employee into the company?

You mean the stock options are just like cash? I didn't think so. The employee is invited to take risks but without the protections.

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