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Options vs. Cash

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Re: Options vs. Cash

#301

Post by taejo »

htormey wrote: post #94
taejo wrote: post #77

Earlier quoted context omitted.

> Negotiate for the best deal on options you can get (I.e quantity, terms like early excercise etc) but treat them as a lottery ticket. Sure, you can ask for a 100% non-dilutable share, but you're not going to get it. In order to negotiate meaningfully, you need to have a valuation of the things you're negotiating on, so you can decide what tradeoffs are good and which are bad.

It's entirely possible to negotiate option excercise dates. Asking for 5-10 years to decide if you want to buy is within the realms of possibility for software engineers at early stage startups (pre b round). Same with early excercise.

Sure. But since this is a negotiation, you probably have to make some choices. Should you press on exercise dates, or on number of shares? If both of these are worth zero in your calculus, you have no means to assess.

Re: Options vs. Cash

#302

Post by pbhjpbhj »

dmoy wrote: post #279
pbhjpbhj wrote: post #225

Earlier quoted context omitted.

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.

But the Revenue consider you to have received value in that "piece of paper" that you can't liquidate? That just seems like perverse tax law - why is it that way?

Surely if they're private shares that can't be sold the extrinsic value is zero, the private share value for tax purposes is no greater than the value of the option?

Re: Options vs. Cash

#303

Post by seanhunter »

moron4hire wrote: post #60

You don't have to over-complicate the analysis. The fact that they give you the options instead of cash is proof the options are worth less than the cash. This is Econ 101: bad currency drives out good as good currency gets horded.

This is too simplistic. There is another reason - options incentivise people in a different way from cash. Say I have an option which is struck at the fair market value of the company on the day I join. When I exercise that option, the value will be the appreciation in the value of the company up to that point (ie the value I have had a role in creating). So options (when the plan is set up well) incentivise employees to maximise the value of the company for shareholders. More broadly you could say that options tend to incentivise long-term value creation ("dividend-seeking") over short-term value extraction ("rent-seeking") behaviours.

Secondly, options incentivise people to stay around (until their options vest). The company also gets to cancel unvested options if a person leaves and even claw back vested but unexercised options in the case of misconduct by the employee. These are all things that are valuable for the company and more difficult to achieve using cash.

Thirdly, there is a big difference to most startups between "value" and "cash". I may well want to pay someone in a cash-equivalent that has equal value to cash (or even greater) because I want to manage my cashflow. After all, I can pay my employees (some of their comp) in options but I have to pay my bills in actual cash, which may be hard to come by until I hit net positive cashflow. In the case of an option, when you exercise and sell, you turn your option into cash, but the cash doesn't come from the company, it comes from whoever buys. This may be more efficient for the company than raising the equivalent cash and paying people directly in cash (because of transaction costs around fundraising).

Re: Options vs. Cash

#304

Post by seanhunter »

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?

He means diminishing _marginal_ utility. Extra income always gives increasing utility on an absolute basis.

An extra dollar of income gives a dollar of utility to everyone, but an extra dollar to Bill Gates gives less marginal utility than it gives to me because it's a much smaller proportion of his net worth and therefore will make less difference to his life than it would to mine.

Re: Options vs. Cash

#305

Post by linkmotif »

dang wrote: post #297
linkmotif wrote: post #118

$$$$$$$$$ cash cash cash cash cash cash cash cash cash cash cash cash cash cash cash now now now now now now now now or even better yesterday. $$$$$$$$$$. Time value of money!! Time value of (startup) (non-founder) options? Not so much. The expected value of your average Silicon Valley start up with golden handcuffs included must be downright negative.

Please don't.

Pretty sincere comment. Taking options instead of cash seems like a really bad idea 99/100 times. Don't know why anyone would do it ever. Either you're a founder or you're not.

Re: Options vs. Cash

#306

Post by deathanatos »

URSpider94 wrote: post #115
walshemj wrote: post #43

What strikes me as odd given the USA's reputation as the home of the self made millionaire that the taxation of employee options is so broken. Treating options on shares as Income when they are not is just stupid options are a high risk instrument that well be worth nothing as opposed to a higher sallery. Why is there not a PAC made up of tech industry employees lobbying for reform of Federal and state laws and argua…

If you are arguing that grants of options shouldn't be taxed -- they are not. If you are arguing that the eventual income from ISO's shouldn't be taxed -- that would be a very odd position, since pretty much every form of income out there in the world is taxed, even illegal income. I can't think of any other income category that is un-taxed under USA tax laws, with the exception of government bonds.

Exercising of options is taxed, which is what I interpreted the OP to be talking about. From the employee's perspective, it seems ridiculous: I'm exercising an option in hopes of future payout, but right now, it's worth literally $0 — I can't convert it to cash — but the government taxes it at >$0 nonetheless.

Re: Options vs. Cash

#307

Post by loeg »

iaw wrote: post #292
mabbo wrote: post #81

Earlier quoted context omitted.

Most of the big post-IPO companies hand out stock on a regular basis as a bonus or a top-up to the actual pay. The corp in question for me was Amazon. Around 1/3 of my pay (more some years) was in the form of AMZN stock that vested every six months. Stock, not Stock Options. No paying for it, no decisions, just boom, you now own X more stocks and how would you like to pay the income tax on that?

What's worth more? A $200K lump sum in 20 years or $10K every year for the next 10? The answer depends on how much interest you can earn on the $10K/year. At around ~7% the $10K/year is worth more than the $200K in 20 years. Your stock grants from Amazon are equivalent to the $10K/year, the options, if you get them, are equivalent to the $200K. The actual weighting is impossible to get precisely but the way you appro…

Even assuming a $200k payout after 20 years is a very optimistic startup outcome.

Re: Options vs. Cash

#308

Post by dang »

linkmotif wrote: post #305
dang wrote: post #297

Earlier quoted context omitted.

Please don't.

Pretty sincere comment. Taking options instead of cash seems like a really bad idea 99/100 times. Don't know why anyone would do it ever. Either you're a founder or you're not.

More things can make a comment bad than insincerity.

Re: Options vs. Cash

#309

Post by linkmotif »

dang wrote: post #308
linkmotif wrote: post #305

Earlier quoted context omitted.

Pretty sincere comment. Taking options instead of cash seems like a really bad idea 99/100 times. Don't know why anyone would do it ever. Either you're a founder or you're not.

More things can make a comment bad than insincerity.

Well if the comment seemed gauche, it was meant to reflect my opinion of the discussion.

Otherwise, I just reviewed comment guidelines. Don't see what might merit the "please don't". Please don't... what?

Re: Options vs. Cash

#310

Post by GFischer »

asah wrote: post #131
123aswin123 wrote: post #113

Cash is king any day! If you aren't in the founding team!

Sadly this is too often a valid heuristic. At the same time, my friends and I did "pretty well" as employee 3,000+ at this crazy search engine company that couldn't make it because "nobody clicks on ads."

I'd say that if you're employee 3.000, the company has already made it, although, as a counterexample, Uber has 6.700 employees and I don't know if it will bust or not.
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