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Options vs. Cash

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Re: Options vs. Cash

#201

Post by Pyxl101 »

hinkley wrote: post #80
sulam wrote: post #63

Earlier quoted context omitted.

I've been on the other side of two of these and the explicit alternative in each case was bankruptcy. Also asset transfers are more expensive to the acquirer because you have to explicitly delineate the assets you're buying and what you're not buying. This makes for more lawyer time and pushes the transaction costs up significantly. The real reason to do it is because the team there at the time is more valuable as a…

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.…

> Out of curiosity, how do you keep the employees from walking after an asset only transfer?

Their compensation at the new company will have a vesting schedule over some period of time, similar to a stock grant.

Re: Options vs. Cash

#202

Post by adamlett »

scatters wrote: post #172
shaftway wrote: post #153

Earlier quoted context omitted.

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.

No. What someone is willing to pay and what something intrinsically is worth is not the same thing. If the stated presumption is that the company was worth $400M before the $100M cash infusion, then it follows that it must be worth $500M after that.

Re: Options vs. Cash

#203

Post by geoffreyy »

Would making secondary market accessible to employees after a cliff - i.e. 2 years - solve this issue of "lottery tickets" we hear all the time?

If we let employees access liquidity events by having the board organizing restricted secondary sales every year, then their options will have a higher probability to have real value?

After all, VCs have lot less risk than employees... We can't diversify our portfolio like they can. They want to invest their money, we want liquidity. Giving us financial flexibility would have only pros IMO and would be a powerful recruiting tool as well.

At my current company, I pushed a lot for employees to get 10yr exercise window extension, which we now have. Now we need to push to get liquidity. I feel like it is our responsibility as employees to keep things moving for a fairer future.

We help adding value to the company, I think it will be fair to be able to sell our options even if the company is still private.

There are also companies like Equity Zen [1] that help giving employees liquidity. I wonder if that is a good alternative too?

Basically if we can unlock the value of options before an exit, options stop being lottery tickets and everyone is happy.

[1] https://equityzen.com

Re: Options vs. Cash

#204

Post by [deleted] »

georgeecollins wrote: post #156

"..why shouldn’t the startup go to an investor, sell their options for what they claim their options to be worth, and then pay me in cash?" Because an option held by an employee has more value because it functions as an incentive.

[deleted]

Re: Options vs. Cash

#205

Post by gech »

state_less wrote: post #198
blennon wrote: post #162

Earlier quoted context omitted.

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…

I'd prefer plain old stock without restrictions and a larger proportion of it. I think we ought to target a controlling interest for the employees (i.e. employees own over 51% of the company) and shareholders vote on the weight of their shares, like they normally do. In sum, I'd rather see a founder worth $100 Million and 999 employees worth $900k than a $800 Millionaire and 999 employees worth $200k. And I actually…

There are plenty of people, especially on here, that want to maintain the ever widening gap between the many and the few. You make a great point about how more even distribution would increase the participation in the economy leading to more activity naturally.

Re: Options vs. Cash

#206

Post by rhizome »

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…

or even just +$10k

As someone who has been exactly there, this doesn't compensate for the lower salaries that are de rigeur in startups. Not to mention being an absolute insult compared to the employee's degree of contribution to the resulting event.

"Better than nothing, or being underwater" is pretty thin gruel in practice.

Re: Options vs. Cash

#207

Post by [deleted] »

iagreeentirely wrote: post #197
hinkley wrote: post #85

Earlier quoted context omitted.

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.

I disagree. I've been part of multiple startups; Only with the first two did I actually expect to make more money than I would at BigCo. Not because the later startups were worse, but because I was less naive. The reason that I joined those other startups -- and the reason that I more often work for startups than big companies -- is not about money. It's about pace of career development. Everything on my resume that…

[deleted]

Re: Options vs. Cash

#208

Post by susw »

phamilton wrote: post #121
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…

Yes. Assume $300k total comp at Facebook/Google/Netflix for a Senior Engineer. Getting $200k at a non unicorn startup is very rare for a Senior Engineer. $180k is more often the cap and $160k is the norm. And while $300k assumes fairly high performance at a top public company, it's certainly not the upper bound.

TIL. Those numbers are definitively higher than I would expect. Here in Norway the average for someone with a technical or scientific degree and 5-9 years of experience in private sector is 690 000 NOK [1], or about 80 000 USD. The 90th percentile for 10 years experience is 915 000 NOK or 107 000 USD. So for me the idea of making another 100 000 USD more at another company is quite foreign.

[1] https://www.tekna.no/en/salary-and-negotiations/salary-stati...

Re: Options vs. Cash

#209

Post by paul »

"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. "

100% false.

Re: Options vs. Cash

#210

Post by cosmoharrigan »

arjunrc wrote: post #86
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.

Amazon's 1997 Letter to Shareholders: http://media.corporate-ir.net/media_files/irol/97/97664/repo...
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