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Options vs. Cash

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Re: Options vs. Cash

#311

Post by GFischer »

lostcolony wrote: post #11
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…

Given what you know about Bitcoin now, would you buy $100k worth of bitcoin in 2010? Of course you would. Except...I didn't tell you that your investment would be held by Mt. Gox. You lost your investment. There is always risk. Always. 97% of startups fail. They are extremely high risk. The earlier you buy in, the higher the potential payout, but the more likely you are to be backing one that will fail. Even the succ…

I think that 97% number is misleading.

Sure, maybe 97% fail, but most have already failed before taking on an employee on equity.

A more appropriate number would be the number of startups that fail after that milestone.

For instance, I calculated the numbers for my country, 40% of startups that get accepted into an incubator succeed, 40% fail and close, and 20% stagnate (mine is currently in the 20%).

So, you're buying a 40% ticket, not a 3% ticket. Still losing odds, but not so much so, and if you're an early employee, you can really help tilt the odds (5%? 10%? I don't know).

Re: Options vs. Cash

#312

Post by phamilton »

iaw wrote: post #290
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.

Throw in stock growth for companies like Google back in the day and FB more recently. FB stock has doubled in ~2 years increasing the liquid value of employee stock compensation by nearly the same amount.

While that's true, I could invest my own funds in Google or Facebook stock and reap similar growth (depending on my access to funds to invest).

Also, some companies will have target compensation bands (I know Yahoo did) where an increase in stock price will actually result in a smaller additional grant each year.

Re: Options vs. Cash

#313

Post by dang »

linkmotif wrote: post #309
dang wrote: post #308

Earlier quoted context omitted.

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?

"Be civil. Don't say things you wouldn't say in a face-to-face conversation." Or, as we post frequently: Please post civilly and substantively, or not at all.

"My opinion of the discussion" is already off-topic and meta. Such comments are always worse than the discussions they're criticizing, while posing as somehow better, which makes them worse still. If you have a substantive point to make about the topic, state it straightforwardly; otherwise please refrain.

Re: Options vs. Cash

#314

Post by linkmotif »

dang wrote: post #313
linkmotif wrote: post #309

Earlier quoted context omitted.

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?

"Be civil. Don't say things you wouldn't say in a face-to-face conversation." Or, as we post frequently: Please post civilly and substantively, or not at all. "My opinion of the discussion" is already off-topic and meta. Such comments are always worse than the discussions they're criticizing, while posing as somehow better, which makes them worse still. If you have a substantive point to make about the topic, state i…

> straightforwardly

Alright. Point taken. Thanks for clarifying.

Re: Options vs. Cash

#315

Post by kbutler »

jasode wrote: post #27
i_dont_know_ wrote: post #6

I started off once thinking "yay, X% means I get X% of the company!" and then I found out the shares can be diluted. Then I learned "non-dillutable". Then I learned about vesting periods, windows for exercising options, and a whole slew of financial terms and devices; each one seemed to come with its own unique "gotcha" that, if you didn't know about, would cost you nearly everything. Everyone I talk to about these a…

>"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…

> More important than dilution is the shares multiplied by price.

But even with an "up round", where ownership percentage is diluted but your n-shares * price goes up, liquidation preferences can reduce or eliminate your value.*

As the GP said, there's always that "one more thing" that can wipe out your value.

(*citation: personal experience)

Re: Options vs. Cash

#316

Post by stratigos »

sheeshkebab wrote: post #256
shemnon42 wrote: post #250

Earlier quoted context omitted.

Shazam, but for food.

So, I guess the answer is - cash? Either that or find something that people need and build it (rather than bitching about options/vesting crap).

Have you been in the industry a long time? No one is "bitching" about options. Did you read the article? Its not crap, its maddening amounts of information completely irrelevant to the fields of Computer Science and software engineering. Yet, its a reality most of us must face, since there are a lot more job openings for startups than any other sized business. And since its in the business' interests to provide monopoly money instead of real money, this problem doesnt seem to ever go away. If you ever get into freelancing, its unlikely you will never be met with such offers. Its also likely your contract will dissolve into said monopoly money at some point too.

If anything, we're "bitching" about wanting actual money for compensation, not a raffle to a lottery that is highly likely to have no prize at all, and just as likely to be worth far less than the typical compensation in cash.

Re: Options vs. Cash

#317

Post by URSpider94 »

walshemj wrote: post #299
URSpider94 wrote: post #115

Earlier quoted context omitted.

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.

We are talking about capital gains and not income most companies we are talking about don't pay dividends.

Capital gains are considered "taxable income" by the IRS. I'm fully aware that the profit from ISO's is from cap gains, not dividends.

Source: http://www.taxpolicycenter.org/briefing-book/how-are-capital...

Re: Options vs. Cash

#318

Post by ant6n »

mrajcok wrote: post #232
ant6n wrote: post #177

Earlier quoted context omitted.

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).

Interesting. Why not use the shares as 100% collateral?

Re: Options vs. Cash

#319

Post by warcher »

pbecotte wrote: post #242
warcher wrote: post #216

Earlier quoted context omitted.

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.

Untrue. Also untrue that you need funding-- you can replace funding with a brutal workload and a lot of patience. I did it, ask me how, haha.

I mean, don't get me wrong, you are gonna sign up to be broke. For a while. A lot of people have kinda boxed themselves in with a very comfortable middle-to-upper-middle class lifestyle that closes a lot of doors via their household burn rate. That's not the system being out to get you, that's a perfectly valid life choice that you and you alone are responsible for.

Re: Options vs. Cash

#320

Post by warcher »

state_less wrote: post #263
warcher wrote: post #216

Earlier quoted context omitted.

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…

One reason you don't see founders is that, it is so brutal. The odds are stacked against you. Even if I buy lotto tickets with a positive expected return, the variance can make it untennable/unworkable. One would hope the VC comes in and smooths this situation out some, so that more people participate. You're going to have a lot of brilliant people going down dead ends on no fault of their own, why not cushion the bl…

More and more I find myself reasoning about competitive advantage and stuff like that-- whenever I put up with something really unpleasant, I think "Hey, how many of my competitors did I just shake off?"

If everybody got funded, I think the market would just devalue ownership of a company, since, with the barriers to entry knocked down, it wouldn't mean as much. Think about the erosion of the market value on a college education over the years.

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