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Options vs. Cash

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Re: Options vs. Cash

#241

Post by alpha_squared »

htormey wrote: post #92
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.

Startups say that but I think in many cases applicants go to startups because they can't get a job at a bigco that will pay them more. This especially true for new grads who didn't go to a shiny University. Now this isn't a bad thing as one of the best reasons to go to a startup is to sharpen or learn new skills to become more employable. It's basically what I did till I could swap to a bigco.

> ...applicants go to startups because they can't get a job at a bigco that will pay them more...

I can't speak for others, but I can certainly speak for myself and say that this isn't true. I had my internships at larger companies. Sure, they're not the big 5, but big enough that they're household names. I used them as resume boosters and now _prefer_ startups over large companies.

I was also fortunate enough to grow up without a lot of money, so my lifestyle is fairly affordable and I never had the luxuries that could be difficult to transition to a lifestyle without them. Because of that, and my interest in working on bleeding-edge-and-could-fail tech, I don't mind the risks that startups offer.

I'm confident enough in my skill set that I know I can go after many of those high paying jobs with at least a modicum level of success _somewhere_, but I like the challenges and pace of the startup space instead. I've even rejected offers that offered a larger salary in exchange for a lower salary at a more exciting (and even earlier stage) startup. Does that make me naive/crazy? I don't know, maybe. It's just what excites me more and the tradeoff is worth it for me.

Re: Options vs. Cash

#242

Post by pbecotte »

warcher wrote: post #216
state_less wrote: post #198

Earlier quoted context omitted.

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…

As somebody who's founded a couple companies, there just aren't enough people with the appetite for risk and drive needed to manage a controlling interest in a company. And on an economic level, if the net compensation level, including crushing levels of stress and overwork , was so bad between founders and employees, you'd see a lot more founders until the system balanced itself out. And you do not. Most real good e…

Come now, you believe that more people don't found companies because of the stress? It seems far more likely that most people don't have the capital assets for that to be an option, except three groups... 1. The very young who have very low expenses, the ones who cashed out already, and the ones who started rich.

Re: Options vs. Cash

#243

Post by metaphorm »

rguzman wrote: post #5

i think options do a couple of things: 1) they let employees invest in startups using their time instead of their money, which is handy when you aren't rich and 2) they allow the company to have a legal framework around an IOU: take less salary now, bigger payout later maybe. thought experiment: knowing everything you know about e.g. stripe right now, would you buy $100k worth of stripe back in ~2012? in 2012 it was…

this breaks down quickly because most employment offers at startups don't use option compensation, er, optionally. it is a mandatory substitution for base salary.

Re: Options vs. Cash

#244

Post by bogomipz »

100k wrote: post #239
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…

Ah ok utility as in utilitarian, that makes sense. Thanks for the explanation.

Re: Options vs. Cash

#245

Post by TimPC »

It just goes to show that just because you think you know how to evaluate stock doesn't mean you do. I have a pretty good understanding of dilution, tax implications, liquidation preferences and so on. But that 5% of equity issued to employees => equity actually acted issued is shocking to me (I would have guessed 35-40%). A friend once told me: unless you're a founder the right estimate of equity is $0 (By which he meant: be comfortable with an offer in every other aspect, then take equity. If you only have a 1/20 chance of getting your equity I'd say that advice is more true than I initially thought.)

Re: Options vs. Cash

#246

Post by defen »

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.

This article[0] from almost 10 years ago estimated that the Google IPO resulted in 1,000 people having more than $5 million worth of Google shares.

So I guess it hinges on how you define "instrumental" and "almost none". It's a tautology to say that "instrumental" means "they contributed to the effort", so I would say "instrumental" means "it seems like no one else could have done it" and "almost none" means less than 5%. If you had to take a wild guess about Google, what percentage of that 1,000 would you estimate were instrumental? Furthermore, presumably there are more Google millionaires now, 10 years later. I wonder what percentage of those were also instrumental in Google's success?

[0] http://www.nytimes.com/2007/11/12/technology/12google.html

Re: Options vs. Cash

#247

Post by bogomipz »

rmah wrote: post #73
cynicalbastard wrote: post #45

Earlier quoted context omitted.

> That means everybody gets diluted including the founders, the angels, the VCs, and yes the employees too. founders, angels, and early round VCs can simply issue themselves more stock from the pool of unissued shares to counteract dilution.

No they can't. I don't doubt that this has happened before and I'm sure someone can dig up an example or two. However, what you describe is highly questionable and borderline illegal. It's certainly grounds for a lawsuit by other shareholders (including options holders).

>"No they can't."

Can you explain why they can't? I was under the impression that this actually does happen.

Re: Options vs. Cash

#248

Post by htormey »

alpha_squared wrote: post #241
htormey wrote: post #92

Earlier quoted context omitted.

Startups say that but I think in many cases applicants go to startups because they can't get a job at a bigco that will pay them more. This especially true for new grads who didn't go to a shiny University. Now this isn't a bad thing as one of the best reasons to go to a startup is to sharpen or learn new skills to become more employable. It's basically what I did till I could swap to a bigco.

> ...applicants go to startups because they can't get a job at a bigco that will pay them more... I can't speak for others, but I can certainly speak for myself and say that this isn't true. I had my internships at larger companies. Sure, they're not the big 5, but big enough that they're household names. I used them as resume boosters and now _prefer_ startups over large companies. I was also fortunate enough to gro…

I'd agree with a lot of what you said. The only thing I'd challenge is the implied notion that startups are inherently doing more cutting edge stuff than bigco's.

Right now I'm doing a lot of consulting/contracting at startups. Most of the companies I see on my travels are not really doing anything that falls into the category bleeding-edge-and-could-fail. Most are pretty boring and derivative. Especially compared to some of the stuff I saw worked on at Facebook.

I would argue that a lot of the cutting edge stuff that's being worked on these days is happening at bigco's (Google/Amazon/MSFT/Facebook).

Now their are some big exceptions to this but in general that's what I'm seeing while traveling around SV.

I would say that I prefer working with smaller companies for the sense of camaraderie and the relative lack of politics. That and the ability for my work to have a massive impact.

Re: Options vs. Cash

#249

Post by drblast »

Nobody would ever advise you to take a large percentage of your income and buy options or even stock in a single company in the hopes that that company succeeds enough to make you rich. That's gambling.

Being an employee of the company in question doesn't suddenly make that a good idea. It's an even worse idea since your entire financial future is tied to the company's outcome.

They should pay you more to take that kind of risk.

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