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Options vs. Cash

danluu.com

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Re: Options vs. Cash

#271

Post by tdeck »

> A company that gives you 1M options with a strike price of $10 might claim that those are “worth” $10M.

I've had a perspective employer make this exact claim to me. I.E. that I could value my options package by multiplying the strike price by the number of options. I had to go back and clarify that, in fact, those options are worth $0 at the current strike price.

It's hard to see this as anything other than gross incompetence or deliberate deception at this point. Options aren't some new thing that only a few people are doing. Besides, if you're giving them out, you had better bother to learn how they work. I'm curious as to how common these claims are because it's pretty egregious.

(and yes, they were options and not RSUs)

Re: Options vs. Cash

#272

Post by jasode »

benchaney wrote: post #262
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, dilution can be a good thing, but that doesn't change the fact that it can also be a gotcha. > The point is all things are not equal. To restate a sibling comment, dilution means you own a smaller % of a more valuable company. Right but if you aquired your shares under the assumption that you would own the same percent of a more valuable company, you are still being taken advantage of.

>but if you aquired your shares under the assumption that you would own the same percent of a more valuable company,

The employee shouldn't have that assumption. The correct default assumption is that the employees are diluted just like the founders when new equity is sold.

If the founders mislead the employees into thinking they got 1% -- and it would always stay 1% all the way to IPO, that's an issue with the ethics of the founder and not an issue with dilution. Dilution wasn't the problem. It's the dishonest entrepreneur that's the problem.

Put another way, if a founder told me I would be awarded 1% in stock and it would have anti-dilution protection for all subsequent rounds, I would not think to myself "wow, that's great!". Instead, that would be a signal that the founder is either 1) incompetent with math or 2) a crook.

Re: Options vs. Cash

#273

Post by kajecounterhack »

tschellenbach wrote: post #38

Options are a complex topic, this article gets a lot wrong. 1. The base offer. Many startups pay competitive or close to competitive salaries + equity. 2. The value of the options depends on your ability to pick the right startup and you believe that you can make a difference to the company. I have a friend who picked the right startup 4 times in a row. 3. Stock options are typically priced at 25% of the last round.…

> Options are a complex topic, this article gets a lot wrong.

...so what did this article get wrong?

> The base offer.

For high level engineers the disparity between what Facebook/Google will pay you and what you'd make at startups can get pretty high. In my personal experience the salaries aren't actually competitive unless you start personally valuing the equity at a significant level. It seems Dan has the same experience.

> The value of the options depends on your ability to pick the right startup

I think his article does a better job of answering the question "how do you value the options provided by the startup assuming X level of success" than you do here. "I have a friend who picked the right startup 4 times in a row" doesn't really help people figure out if they've picked the right startup. "It's possible! People have made money on the stock market!" > Stock options are typically priced at 25% of the last round.

I'm assuming you're talking about the section where he calls valuations bogus. Your statement here doesn't invalidate the writing: "First, the valuation is updated relatively infrequently" > So in a nutshell, starting companies, joining early stage companies. It really depends on your ability to pick the right company and perhaps more importantly your ability to make a difference.

Thanks for the inactionable advice.

Re: Options vs. Cash

#274

Post by s73ver »

zxcvvcxz wrote: post #233

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. Th…

I dunno. I mean, if that's your plan, why bother with VC funding at all? Why not get a small business loan, and operate that way?

Re: Options vs. Cash

#275

Post by fabiandesimone »

Some folks are commenting, cash.

I would personally prefer Bitcoin or ETH as I suspect the value of either will be exponential in the future.

And for the company, if you buy a load of whichever say at beginning of your company that you keep only to give out bonuses to their equivalent in cash every time a new hire comes, you could actually give out the same amount of cash for less tokens in the future.

Re: Options vs. Cash

#276

Post by alpha_squared »

htormey wrote: post #248
alpha_squared wrote: post #241

Earlier quoted context omitted.

> ...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…

> Most are pretty boring and derivative

This is also true, sorry for implying that all the work is some sort of bleeding edge.

Re: Options vs. Cash

#277

Post by renlo »

jasode wrote: post #99
joncrocks wrote: post #87

Earlier quoted context omitted.

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…

>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. Show example math of how someone could get "diluted too far" resulting in less total value (shares x price) after an investment round that prices the company higher than before. If the total value was truly less, it means it was "down round" which is a different beast. >, you could be…

I'm somewhat new to this topic (and therefore might not understand correctly) but another user, 'oillio', made a response in a different thread [0] which could explain 'getting diluted away to nothing', for example, an investor invests money causing dilution, the company squanders the money or uses it on something that doesn't positively affect the company trajectory. You now own a smaller slice of a pie which is the same size as it was before.

Using his example, if you estimate the value of a company to be 100M and estimate 10 years until IPO, if the investment doesn't raise the value of the company at the time of the IPO in 10 years then the dilution is not good for the employee because the pie is the same size (100M) but his/her shares have been diluted.

Seems like it's pretty difficult to estimate the value of the company in 10 years or the IPO date though which is probably why people just use the amount invested to estimate the value of the company.

[0] https://news.ycombinator.com/item?id=14510483

Re: Options vs. Cash

#278

Post by lazaroclapp »

defen wrote: post #246
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 tha…

I am not sure "it seems like no one else could have done it" applies to Nobel Prize type discoveries or Moon Landing like feats of engineering, much less to software companies.

Don't get me wrong, I don't mean to say that many employees at companies like Google are not brilliant or not extremely effective in their work, but "no one else could have done it" is a useless test that relies on mythologizing people. The way I figure out, the people getting rich (as employees) are those that: a) took the risk to get in early enough, b) performed their jobs competently enough to stay long term and to give the company a chance to succeed, c) got lucky enough in that all the imponderable external factors also resulted in that particular company succeeding. That doesn't mean they weren't "instrumental", in the sense of being the people who actually happened to get the work done. But that's different from "irreplaceable".

Re: Options vs. Cash

#279

Post by dmoy »

pbhjpbhj wrote: post #225
_cbsz wrote: post #179

Earlier quoted context omitted.

> 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.

Couldn't you bootstrap it, get £5k on a credit card for the taxes to exercise some of the options, use the profit to pay the taxes on the rest (or a further bootstrap)?

If the shares are not liquid 'cus the company is still private, then no you can't.

Re: Options vs. Cash

#280

Post by sokoloff »

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…

> Only employees of unicorns have any chance of getting wealthy from stock, and you're unlikely to be an early employee of a unicorn.

Define wealthy.

I have done quite well (not FU, 3-comma money, of course, but solidly 2-comma) from equity as an employee. In my current company, I joined a few months after the Series A (so nowhere near "early"), stayed through the IPO and many years of growth past that.

We were never a unicorn.

Amazon, Facebook, and Google are regularly turning SWEs into millionaires and a substantial part of that is from equity. Microsoft also had a good decade and a half of doing that. Netflix probably does as well. (OK, Facebook was a unicorn; the others probably weren't ever called that, though it may have fit.)

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