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An Engineer’s guide to Stock Options

blog.alexmaccaw.com

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Re: An Engineer’s guide to Stock Options

#71

Post by rexreed »

grellas wrote: post #43

Really nice write-up explaining stock options. A few added thoughts sparked by some of the comments already made in this thread and otherwise: 1. The value of options is inextricably linked to tax and you need to understand the tax basics in evaluating the economic risks and benefits of holding and exercising any kind of option. With NQOs, you are taxed on the spread as ordinary income on the date of exercise (meanin…

Your comments are incredibly awesome. I find myself coming to the comments here after a post like this specifically to see your take on things. Bookmarked.

Re: An Engineer’s guide to Stock Options

#73

Post by spacehome »

svachalek wrote: post #34
kylelibra wrote: post #21

Is there a good formula for figuring out taking a lower salary in exchange for options? For example: . Current Salary On Open Market = X Startup Salary = Y Option Value Today = Z . 4(X) = 4(Y)+Z(2 ) this is obviously the big IF, if people are saying think of it as windfall, maybe 1.5??

If you were going to do it from a pure accounting perspective, you'd take the expected value of the options + salary and compare directly. You should probably also figure in high value benefits like 401(k) match. The problem there is, the expected value is more or less the current market value of the options (if you believe in anything approaching an efficient market), which is more or less the strike price times the…

Maybe.

But just looking at expected value ignores risk. Most people are risk averse, especially at the amounts of money we're talking about here.

Re: An Engineer’s guide to Stock Options

#74

Post by AsymetricCom »

adwf wrote: post #67
JshWright wrote: post #54

Earlier quoted context omitted.

Apparently I've triggered some deep seated angst... Let me try to clarify what I meant, and maybe you'll feel better? This post didn't present any new 'facts' for me. I was already aware of all the details he explained (and most, but not all, of the implications of those details). My point was simply that by framing shares as currency presented them in a way that I had never considered before, and that comparison cau…

I think it's safe to say he's just being unpleasant for the sake of it. The old adage of "If you've got nothing nice to say, don't say anything at all." springs to mind. I thought that shares as currency was an interesting analogy to draw too. Although I guess when you get down to it, anything that's reasonably fungible can be considered currency if you feel like it.

We should definitely not criticize, yes, unless we can provide some kind of positive feedback. I agree. I like how the article had good words in it. We should endeavor to make more articles with good words.

Re: An Engineer’s guide to Stock Options

#75

Post by JshWright »

AsymetricCom wrote: post #68
JshWright wrote: post #54

Earlier quoted context omitted.

Apparently I've triggered some deep seated angst... Let me try to clarify what I meant, and maybe you'll feel better? This post didn't present any new 'facts' for me. I was already aware of all the details he explained (and most, but not all, of the implications of those details). My point was simply that by framing shares as currency presented them in a way that I had never considered before, and that comparison cau…

Not at all, now that I've learned about your learning, we can all discuss how happy that makes us feel. It's a win-win. Wait, maybe if there was a higher context to share our approval of the article without distracting away from its content? Like some kind of high-level rating system that was enforced through a framework of some sort and presented as a low-friction indicator of the quality of the article? We could ev…

It seems I'm woefully ignorant in the ways of online forum posting...

I had assumed that excerpting a specific portion of TFA and highlighting why I found it particularly insightful would have been germane to the conversation thread.

If only there was a way you could have expressed your opinion that my comment didn't add anything to the conversation without resorting to sarcasm and obtuse rhetoric... (Unless you haven't crossed the 'able to down-vote threshold yet... in which case, no worries).

Re: An Engineer’s guide to Stock Options

#76

Post by seefriek »

AsymetricCom wrote: post #68
JshWright wrote: post #54

Earlier quoted context omitted.

Apparently I've triggered some deep seated angst... Let me try to clarify what I meant, and maybe you'll feel better? This post didn't present any new 'facts' for me. I was already aware of all the details he explained (and most, but not all, of the implications of those details). My point was simply that by framing shares as currency presented them in a way that I had never considered before, and that comparison cau…

Not at all, now that I've learned about your learning, we can all discuss how happy that makes us feel. It's a win-win. Wait, maybe if there was a higher context to share our approval of the article without distracting away from its content? Like some kind of high-level rating system that was enforced through a framework of some sort and presented as a low-friction indicator of the quality of the article? We could ev…

Will that do anything about preventing "condescending fuckwit" behavior? I'm betting not.

Re: An Engineer’s guide to Stock Options

#77

Post by willvarfar »

And here's a nice guide from way back in 2004: http://www.ftpress.com/articles/article.aspx?p=170920

What's interesting is that this chap Ivan Goddard is doing the Mill processor, and that has an interesting company structure; OotB has an agreement to incorporate, and they keep renegotiating it. He explains this in this talk: http://www.youtube.com/watch?v=Bxga49vukQ8

Re: An Engineer’s guide to Stock Options

#79

Post by gatehouse »

tptacek wrote: post #18
michaelochurch wrote: post #2

Two corrections: 1. OP says: Once you’ve cliffed, you have the right to buy shares in the company. "Cliffing", when used as a verb, refers to firing someone just before the cliff-- not an employee achieving it. It's something you'd rather avoid. 2. If the company isn't publicly traded, you should ask to see the cap table. If you're employee #30 and your share is 0.05%, that might be fair if it's a biotech that has al…

Exactly what does the cap table have to do with your expected outcome, presuming you know the percentage of your allocation, the liquidation preferences and valuation, and the company's runway?

If you don't know who owns the company you don't even know who you work for. It might not matter to most people as long as the cheques don't bounce, but if you want to even hallucinate having a meaningful role in the direction of the company it starts to matter. I really don't know what people are willing to disclose to employees but the SEC rule for public companies is a 5% stake or more is disclosed.

Re: An Engineer’s guide to Stock Options

#80

Post by Peaker »

joosters wrote: post #63
doki_pen wrote: post #47

Earlier quoted context omitted.

If they gave you shares you'd have to pay income taxes on those shares for something that may never make you any money. Most people wouldn't choose to do that.

But (assuming a startup or young company), the shares would have little value and so the tax would be small. Plus, if the shares became worthless you could offset that loss against future income (I guess?) View it like the company giving you a cash bonus - not many people would turn down the bonus, even if it meant there would be tax due on it. If you think the shares have future value, then paying the tax on their c…

If the shares are given after an investment of $1 million, then 0.5% of the company is $5000, just by a conservative evaluation that takes only the investment value into account.

If you think the shares have a guaranteed future value, then the shares are better than the options.

If you think the shares have a guaranteed lack of future value, then the options are free, whereas the shares will cost you.

If you think there is substantial risk that the shares will have no value, then getting options rather than shares mitigates that risk. You only pay for that mitigation if you actually exercise the options, in which case the cost comes off of a big payoff, rather than an upfront payment out of pocket.

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