Stock Options are like lottery tickets? • Hacker News Board

Re: Stock Options are like lottery tickets?

#11

Post by alephnerd » Sat, May 11, 2024, 10:45 PM UTC

JumpCrisscross wrote: post #6

toomuchtodo wrote: post #5

Earlier quoted context omitted.

Where do you delineate between early and late stage? Series A? Edit: Thank you!

> Where do you delineate between early and late stage? Series A? Conventionally, it’s around Series C, though anyone who’s worth more than $1bn counts in my book. For purposes of this discussion, the annual failure probability for American businesses seems to drop below 5% around the fourth year [1]. At that point, if your options aren’t underwater, it’s fair to consider them to be less like lottery tickets. (I could…

Also depends on the trajectory of the late stage startup - especially with a number of the startups that raised during COVID.

A lot of FOMO investors in that time period made some not-so-great bets which lead to unrealistic valuations and then firesales.

Wiz's $80M ARR but $9B valuation def takes the icing on the cake. (Edit: Lacework, not Wiz - was a brainfart)

Re: Stock Options are like lottery tickets?

#12

Post by alephnerd » Sat, May 11, 2024, 10:46 PM UTC

metadat wrote: post #7

JumpCrisscross wrote: post #3

Yes, from the employee’s perspective in early-stage start-ups; no the rest of the time. For an early-stage start-up employee, a stock option is akin to a lottery ticket in that its value is binary (lots or zero). For a late-stage start-up, the distribution is less binary, so I’d liken it to several rounds at an unbiased casino more than a lottery ticket. For a public company or private company with liquid stock, no.…

As an employee, the options are generally worse than a lottery ticket, because the terms of ownership % can be changed later in closed board meetings, then you're screwed. Very few success stories for early non-founder employees making a big payday. You can do okay, but on average it's not better than getting Meta RSUs or equivalent.

> You can do okay, but on average it's not better than getting Meta RSUs or equivalent

Most people aren't getting hired by Meta, and compensation packages at late stage companies will try to be competitive with peers.

That said, late stage options might not always be a good bet. You as an employee need to do due diligence and ensure their meeting their metrics.

Re: Stock Options are like lottery tickets?

#13

Post by PopAlongKid » Sat, May 11, 2024, 11:22 PM UTC

JumpCrisscross wrote: post #9

metadat wrote: post #7

Earlier quoted context omitted.

As an employee, the options are generally worse than a lottery ticket, because the terms of ownership % can be changed later in closed board meetings, then you're screwed. Very few success stories for early non-founder employees making a big payday. You can do okay, but on average it's not better than getting Meta RSUs or equivalent.

> options are generally worse than a lottery ticket, because the terms of ownership % can be changed later in closed board meetings, then you're screwed This is demonstrably false given there is a market value for common stock in private companies, even early ones, whereas few people would pay face value for a secondhand lottery ticket (even assuming zero risk of scam).

>given there is a market value for common stock in private companies, even early ones

I don't understand what you are talking about. I exercised stock options in a dot com startup within its first year and at no time in the ensuing eight years was there ever a market where I could sell my stock, which eventually became demonstrably worthless. As someone who knew more about it than me later explained, he didn't exercise his options because he knew there would always be millions of dollars in line ahead of him, because of the "board meetings", as stated.

And why wouldn't someone pay face value for a valid lottery ticket from a private party, if more convenient than going to an official seller?

Re: Stock Options are like lottery tickets?

#14

Post by toomuchtodo » Sat, May 11, 2024, 11:24 PM UTC

alephnerd wrote: post #11

JumpCrisscross wrote: post #6

Earlier quoted context omitted.

> Where do you delineate between early and late stage? Series A? Conventionally, it’s around Series C, though anyone who’s worth more than $1bn counts in my book. For purposes of this discussion, the annual failure probability for American businesses seems to drop below 5% around the fourth year [1]. At that point, if your options aren’t underwater, it’s fair to consider them to be less like lottery tickets. (I could…

Also depends on the trajectory of the late stage startup - especially with a number of the startups that raised during COVID. A lot of FOMO investors in that time period made some not-so-great bets which lead to unrealistic valuations and then firesales. Wiz's $80M ARR but $9B valuation def takes the icing on the cake. (Edit: Lacework, not Wiz - was a brainfart)

They just raised $1B at a $12B valuation, but that’s likely predicated on them going on an M&A spree to roll up less healthy competitors or offering compliments before they IPO, vs organic growth.

Re: Stock Options are like lottery tickets?

#15

Post by alephnerd » Sat, May 11, 2024, 11:33 PM UTC

toomuchtodo wrote: post #14

alephnerd wrote: post #11

Earlier quoted context omitted.

Also depends on the trajectory of the late stage startup - especially with a number of the startups that raised during COVID. A lot of FOMO investors in that time period made some not-so-great bets which lead to unrealistic valuations and then firesales. Wiz's $80M ARR but $9B valuation def takes the icing on the cake. (Edit: Lacework, not Wiz - was a brainfart)

They just raised $1B at a $12B valuation, but that’s likely predicated on them going on an M&A spree to roll up less healthy competitors or offering compliments before they IPO, vs organic growth.

I brainfarted. I meant Lacework, not Wiz.

Wiz actually has an M&A strategy (Aqua is definetly on the table, as well as Tamnoon) seems to and some greenfield product development in progress.

Lacework on the other hand mismanaged a lot of hiring, and there were some shenanigans in the sales org.

Wiz actually has a healthy pipeline and execution, but Lacework never had that when they did their raise.

Re: Stock Options are like lottery tickets?

#16

Post by blackeyeblitzar » Sat, May 11, 2024, 11:38 PM UTC

I definitely agree that options are not worth much at pre public companies, unless it is a very obvious case of a runaway success (like OpenAI or whatever). It’s not just that the valuations can be misleading (look at 2021 peak valuations), but also that the company’s leadership (CEO and board) can do all kinds of things that affects the employee’s actual value in those options without any transparency or input from employees. Like they could issue many options and dilute existing owners. They could take on new funding with bad terms like liquidation preferences or whatever. They can choose whether to provide liquidity (through an IPO or secondary) or just stay private for as long as they want. They can choose to expire your options after you leave. The fine print in the agreements that come with most offers of employment and stock option grants give those companies lots of freedom and give employees almost nothing.

It’s not just that the chance of success for a startup is low. That alone would make it a lottery ticket. But it’s also that you have to rely on trusting a small group of people that are usually not at all transparent and usually not deserving of trust either. They can screw you over even if the company is successful - which is exactly what happened in many prominent cases like Skype’s acquisition. This needs to change, and the reason it hasn’t is because employees who don’t know any better keep agreeing to work at these companies under abusive terms. Instead, they should start rejecting these companies until the norm is to have fair employee-friendly terms and total transparency around the cap tables, investor agreements, etc.

Re: Stock Options are like lottery tickets?

#17

Post by blackeyeblitzar » Sat, May 11, 2024, 11:42 PM UTC

JumpCrisscross wrote: post #9

metadat wrote: post #7

Earlier quoted context omitted.

As an employee, the options are generally worse than a lottery ticket, because the terms of ownership % can be changed later in closed board meetings, then you're screwed. Very few success stories for early non-founder employees making a big payday. You can do okay, but on average it's not better than getting Meta RSUs or equivalent.

> options are generally worse than a lottery ticket, because the terms of ownership % can be changed later in closed board meetings, then you're screwed This is demonstrably false given there is a market value for common stock in private companies, even early ones, whereas few people would pay face value for a secondhand lottery ticket (even assuming zero risk of scam).

I am not sure what you mean by “market value”. What’s the market exactly when employees cannot freely trade their vested options? Most companies restrict that, which is very unjust. For a secondhand lottery ticket, if there is zero risk of scam, I’d say its value is at least its original retail value, and there is no restriction on trading it. So if someone wanted to make a market, they could.

Re: Stock Options are like lottery tickets?

#18

Post by advisedwang » Sat, May 11, 2024, 11:43 PM UTC

To value stock options correctly you must know a lot more than the headline valuation. You have to know the size (in $ and units), preference and other terms of every funding round, burn rate, cash left, whether any one investor has outsize control of the company and finally a good view of the competition, market and potential buyers. This is not available to the average employee, and often not to founders.

Stock options are a gamble not because of the economics of startups (although that can be true), but because the average employee cannot do serious financial decision making around them.

Re: Stock Options are like lottery tickets?

#19

Post by toomuchtodo » Sat, May 11, 2024, 11:43 PM UTC

alephnerd wrote: post #15

toomuchtodo wrote: post #14

Earlier quoted context omitted.

They just raised $1B at a $12B valuation, but that’s likely predicated on them going on an M&A spree to roll up less healthy competitors or offering compliments before they IPO, vs organic growth.

I brainfarted. I meant Lacework, not Wiz. Wiz actually has an M&A strategy (Aqua is definetly on the table, as well as Tamnoon) seems to and some greenfield product development in progress. Lacework on the other hand mismanaged a lot of hiring, and there were some shenanigans in the sales org. Wiz actually has a healthy pipeline and execution, but Lacework never had that when they did their raise.

This is helpful, appreciate the context.

Re: Stock Options are like lottery tickets?

#20

Post by sigmoid10 » Sat, May 11, 2024, 11:55 PM UTC

advisedwang wrote: post #18

To value stock options correctly you must know a lot more than the headline valuation. You have to know the size (in $ and units), preference and other terms of every funding round, burn rate, cash left, whether any one investor has outsize control of the company and finally a good view of the competition, market and potential buyers. This is not available to the average employee, and often not to founders. Stock opt…

The key difference is that diversification of risk works for stocks. Yeah, if you invest in just one company it's like going to a casino. So if your portfolio only includes stocks from your employer, you might as well gamble all your money. But when you invest in lots of different stocks, you can make pretty stable profits, whereas you'll never make any stable long term income by diversifying your bets in a casino.