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Options vs. Cash

danluu.com

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Re: Options vs. Cash

#231

Post by danyim »

allsunny wrote: post #178

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…

Did you mean to say the odds of striking it rich are nowhere close to a lottery in a favorable or unfavorable light?

Re: Options vs. Cash

#232

Post by mrajcok »

ant6n wrote: post #177
mrajcok wrote: post #88

Earlier quoted context omitted.

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"?

Instead of paying for the shares with cash now, I agree to pay for them in 10 years, paying interest at the minimum rate the IRS will allow (~2%). The 51% recourse means that the shares themselves are the only collateral for 49% of the loan amount (to limit my risk if the company goes bankrupt and a creditor tries to actually collect on the note).

Re: Options vs. Cash

#233

Post by zxcvvcxz »

I've never been a fan of being an employee at an early-stage startup. The options on average have close to zero value, the salaries are lower, and the hours/working conditions are worse [than at generic big company].

So now as a startup founder I'm thinking, why even give my employees options at all? Me and my co-founder are the ones that believe most in the company's upside, so the more shares for us, the better. The plan I've come up with is to 1) try and raise those salaries as best I can to market rates, with the added perks of flexibility, and 2) create a plan for profit sharing in the future.

Profit sharing agreements make more sense to me for a number of reasons. First of all, like equity, its value may never materialize. But secondly, there's actual liquidity and numbers behind it as a possible outcome. Also without the employee stock option pool, I can sell a bit more equity for more cash for better salaries.

What do people think of this idea?

Re: Options vs. Cash

#234

Post by barrkel »

paul wrote: post #209

"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.

Yup. I came here to write this. You don't know about how those people helped because they're not the public face of the company; but often they started the seed of something that grew into something big (like you!) or solved some critical technical problem blocking scale, or helped land a key deal, or any of a hundred factors that, if they weren't done, would have severely hit the growth of the company, and couldn't have been easily done by someone else walking in off the street with a nice CV - things that required history with the company, its codebase or market or customers etc.

Re: Options vs. Cash

#235

Post by robmay »

oillio wrote: post #56
jasode wrote: post #27

Earlier quoted context omitted.

>"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…

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…

Isn't it amazing that every day, Apple offers new options, diluting everyone else who owns stock? Crazy anyone would work there, or want any Apple stock given that fact.

Re: Options vs. Cash

#236

Post by bogomipz »

Could someone explain this statement to me:

>"Like most people, extra income gives me diminishing utility, but VCs have an arguably nearly linear utility in income."

Specifically, what is this "utility" and how is it diminished by more cash compensation exactly?

Re: Options vs. Cash

#237

Post by rocketraman »

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.

Which should have been clear to you when you joined the company and read and signed the employment and stock options agreements (you did read them, didn't you?). If that isn't to your liking, don't work for a startup.

Re: Options vs. Cash

#238

Post by kod »

susw wrote: post #208
phamilton wrote: post #121

Earlier quoted context omitted.

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/e…

Those numbers are accurate for the U.S.

Possibly even a little low for the Facebook / Netflix / etc tier.

Re: Options vs. Cash

#239

Post by 100k »

bogomipz wrote: post #236

Could someone explain this statement to me: >"Like most people, extra income gives me diminishing utility, but VCs have an arguably nearly linear utility in income." Specifically, what is this "utility" and how is it diminished by more cash compensation exactly?

Utility is a concept from economics: https://en.wikipedia.org/wiki/Utility

You can think of it as "how much benefit I get from a thing".

What he is referring to is diminishing marginal utility, which is that as you consume more and more of a good (in this case, income) you derive less benefit from it. https://en.wikipedia.org/wiki/Marginal_utility

This is backed up by psychology research indicating that people hit a happiness plateau at some income level.

Re: Options vs. Cash

#240

Post by emmett »

Mikho wrote: post #212

Just week ago there was discussion about options and people shared this tool ( https://tldroptions.io/ ) to calculate amount of money an employee gets based on round and % of the company as options. Despite the fact that in reality even in best case scenario the sum is rather small -- like 0.01% of a Series A startup with $1B exit will give you like $40K for your 6 year work -- more important issue is different liqui…

If you join a startup immediately following a Series A and you only get 0.01%, you almost certainly got screwed. We were fairly stingy with equity, and an engineer joining then would have gotten around 0.5%, 50x what you're basing your math on. And over a 4 year vesting period, not a 6 year one.

$2mm ($40k x 50) for your 4 years of work is substantially less bad. And employees who stayed with us tended to get new equity grants over time as well.

So yeah, don't take a startup job for tiny amounts of equity. You should get significant equity for joining that early with that much risk.

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