Ask HN: Is it just me or do a lot of people not know how stock options work? • Hacker News Board

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#51

Post by chimeracoder » Tue, Dec 20, 2016, 10:20 PM UTC

AnimalMuppet wrote: post #41

chimeracoder wrote: post #5

To add to all of this, most people really don't understand the tax implications of options (whether they're ISOs, NSOs, or not options at all but instead are RSUs). It's hard to explain those without looking at a person's individual situation (the company, the initial value, the current valuation, and the person's tax bracket), which is why there's not a lot of talk about them. But the taxation can very easily be the…

True. But it's also important to not view taxes as the thing in deciding what to do. I had options that I could exercise (at a big, publicly-traded company, so I didn't have the startup, no-liquidity issues to worry about). My options were worth quite a bit of money. I had already exercised enough to put me at the edge of the next incremental tax bracket. On about December 15, I was looking at it, and thought it was…

> Moral: When money is growing on trees, pick it.

The problem is that taxes can quite literally cause you to lose money.

For example, exercising options (at a gain) is a taxable event whether or not the options are actually liquid. In fact, if you're an early employee and your startup has been very successful, you could literally be looking at a tax liability of tens or even hundreds of thousands of dollars, even if your strike price is only a couple thousand dollars. (That would be the case if you were a very early employee and the company was very successful - ie, the exact situation we think of as the "upside").

If you leave the company (voluntarily or not), you have 90 days to decide whether or not to exercise those options and pay the taxes immediately, even though you won't get to actually sell the underlying shares until a liquidity event happens. There's no guarantee that the liquidity event will give you the same (or higher) price, and even if those options tank, you don't get your taxes back.

So, if those options subsequently tank to "only" double what they were worth when you joined the company as employee #1, you might think "hey, that's great - I made a 200% return on my equity". Except, you didn't - because the taxable amount was 100 times that - so you're deeply in the red.

(These numbers are all made up, but the orders of magnitude I'm talking about are quite realistic under the parameters I described.)

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#52

Post by planteen » Tue, Dec 20, 2016, 10:21 PM UTC

stockoptionsta wrote: post #15

planteen wrote: post #12

Keep in mind when you say "stock options," it can mean different things. The first thing that comes to my mind when you say "stock options" is options trading on publicly traded companies. That is buying and/or selling contracts of puts and/or calls. The second is "stock options" at private companies as compensation, which is what you are referring to. There are many variations on how this works. I've seen companies,…

You're right, I thought it would be clear from the context that I'm talking about employee stock options. It seems like your experience with stock kind of proves my point and reveals the employee side of this problem — because you didn't fully understand how all these things work, and no one explained it to you — you had much different expectations. And now, instead of incentivizing you to stay, you employer leaves y…

Yeah, I agree, that is a good way to put it. The K-1s were such a mess... I think I got 15-20 pages worth of complex tax documents. It was especially messy since we had a part ownership of another company in a different state. I don't consider myself a financial dunce either (I can handle W-2s and 1099s fine). Employee stock purchase & RSU awards at big companies are honestly so much more straightforward (and fair).

The way I got diluted also made me really take the advice to heart I always hear on HN - when there is a buyout, the executives will be the ones at the table arguing for themselves to get paid. But nobody is going to be there for you.

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#53

Post by Jugurtha » Tue, Dec 20, 2016, 10:23 PM UTC

Pardon my ignorance, but I did a search on this thread for the word "lawyer" and there was no match.

My stupid question: Doesn't San Francisco have good lawyers who are specialized in this stuff? I mean, a lawyer who's getting paid by you, not by the company.

I'm not advocating complete ignorance of the matter, but there are people who know the ins and outs of this and are aware of most of the missteps through which they can guide you.

My point is that having a lawyer also serves as a deterrent and sends a signal you're not to be hustled. It also tells you about the people you're dealing with: the company not liking it should set off your spidey sense.

I mean, the first thing someone who's hustling would do is to be offended you're taking precautions because it hurt his feelings that you don't "trust him". It's not that you don't trust him.

These things are just like prenups. People's feeling about them stems from the assumption that at the time they're activated, they'd be feeling the same for each other as they are now, which is not true. By the time a prenup is activated, people usually hate each other, and a prenup serves to protect you from the future version of them, and them from the future version of you. The versions that hate each other. There's a reason billionaires have the cheapest divorces, and artists/athletes have the most expensive ones.

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#54

Post by planteen » Tue, Dec 20, 2016, 10:29 PM UTC

DaiPlusPlus wrote: post #45

tptacek wrote: post #25

Earlier quoted context omitted.

Which, in turn, sets up a vicious cycle, because employers know that employees don't value equity as much as a cash-equivalent benefit, and respond rationally to that incentive by reducing equity grants. (This is a positive claim, not a normative one).

On the contrary, because it has a low perceived value they make up for it with volume. Look at how Uber throws insanely high paper-valued equity to its hires. Similarly when I worked for a startup I was promised almost a full percent of a company they expected to grow to a hundred-million dollar valuation. $1m for a year's work? Can't go wrong with that. (Side note: I didn't get the equity as I was conveniently laid-…

Ouch. Did they reach $100MM valuation or were they below that?

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#55

Post by planteen » Tue, Dec 20, 2016, 10:34 PM UTC

logfromblammo wrote: post #26

probably_wrong wrote: post #2

When it comes to stock options, HN has taught me two things: 1. They are worthless, as >90% startups fail and you won't be getting anything in that case. 2. If they are not worthless, you might not be able to afford paying for them anyway [1]. Add to that how difficult it is to get a simple, clear answer to the question "how do I invest my money?". So yes, I wouldn't be surprised if most people didn't know how stock…

Even though anecdotally, I have made some money on option grants, I now see them as a symptom of cargo-cult management practices. A few weeks ago, a co-worker asked me for advice about a new (to us) employee stock purchase plan, and I basically said, "don't shit where you eat." Messing around with your employer's stock isn't a wonderful idea. Most people should just be blindly investing x% of their income in a robot-…

I agree with what you are saying about not having too many eggs in a basket. I have seen many variations on ESPP:

1) You can buy the stock at market value on some set date by paycheck deductions (but you avoid that commision!). Worthless, not work doing IMHO.

2) You contribute up to N% of your salary at M% discount on the stock. I would do this and sell immediatley. There was a small risk associated with that of a big market movement, but in my case M was 15%, so that made me feel comfortable. It worked out to some free money.

3) There was a 6-month window. The company took the lower of the prices at the start of the window or end of the window AND applied a discount. That was awesome. A big rise in 6 months led to big gains. If the stock was tanking, you still got the discount. I would still sell immediately.

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#56

Post by qwrusz » Tue, Dec 20, 2016, 10:46 PM UTC

calcsam wrote: post #14

No, this is not just a problem you're having. I was an early engineer at Zenefits and found myself holding stock options seminars to explain this stuff to the rest of the engineers. I built optionvalue.io as a calculator to help people answer some basic questions about what their stock is worth, and I'm building it out more to answer questions (eg, tax implications and exercise windows). I've talked to grellas and so…

Just checked your option value calculator. I understand you're still building it out but wanted to say nice work so far!

Something like this that's easy and clear could be really useful. Like some of the "estimate tax refund" calculators online, while details of the US tax code can be information overload, going through guided steps on an estimate calculator a person can learn a ton of key info. Cheers and GL.

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#57

Post by smallnamespace » Tue, Dec 20, 2016, 10:47 PM UTC

JonFish85 wrote: post #40

smallnamespace wrote: post #29

Earlier quoted context omitted.

To play devil's advocate though, you are being provided more information than the external market would be by virtue of being an employee of a company, and also someone working in the industry, etc. Having more information at your disposal to evaluate a company means that option grant is worth more to you than to a random person on the street, which is why the company will pay you in options. It's better for the comp…

As a counter-argument to this, the employees at Enron were pretty blindsided (for the most part) when their stock was wiped out.

Naked accounting fraud on the level of Enron is exceedingly rare though. But all the other reasons a company can go belly-up (bad product, bad customer base, no roadmap, stopped doing R&D, etc.) are usually much more visible to an employee than an external investor.

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#58

Post by [deleted] » Tue, Dec 20, 2016, 10:53 PM UTC

tptacek wrote: post #25

mikestew wrote: post #4

many employees don't understand the basics of stock options, hence they don't value equity as much as employers / investors do The fact that I know the basics of stock options is precisely the reason I don't value equity as much as employers or investors do. I can count on two fingers the number of companies whose stock options put money in my pocket, and one of them is Microsoft. I would need many hands to count the…

Which, in turn, sets up a vicious cycle, because employers know that employees don't value equity as much as a cash-equivalent benefit, and respond rationally to that incentive by reducing equity grants. (This is a positive claim, not a normative one).

[deleted]

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#59

Post by user5994461 » Tue, Dec 20, 2016, 10:54 PM UTC

DaiPlusPlus wrote: post #45

tptacek wrote: post #25

Earlier quoted context omitted.

Which, in turn, sets up a vicious cycle, because employers know that employees don't value equity as much as a cash-equivalent benefit, and respond rationally to that incentive by reducing equity grants. (This is a positive claim, not a normative one).

On the contrary, because it has a low perceived value they make up for it with volume. Look at how Uber throws insanely high paper-valued equity to its hires. Similarly when I worked for a startup I was promised almost a full percent of a company they expected to grow to a hundred-million dollar valuation. $1m for a year's work? Can't go wrong with that. (Side note: I didn't get the equity as I was conveniently laid-…

> $1m for a year's work?

It's usually 4 years vesting. So obviously, it is NOT $1M for a year work.

Re: Ask HN: Is it just me or do a lot of people not know how stock options work?

#60

Post by pilom » Tue, Dec 20, 2016, 10:56 PM UTC

logfromblammo wrote: post #26

probably_wrong wrote: post #2

When it comes to stock options, HN has taught me two things: 1. They are worthless, as >90% startups fail and you won't be getting anything in that case. 2. If they are not worthless, you might not be able to afford paying for them anyway [1]. Add to that how difficult it is to get a simple, clear answer to the question "how do I invest my money?". So yes, I wouldn't be surprised if most people didn't know how stock…

Even though anecdotally, I have made some money on option grants, I now see them as a symptom of cargo-cult management practices. A few weeks ago, a co-worker asked me for advice about a new (to us) employee stock purchase plan, and I basically said, "don't shit where you eat." Messing around with your employer's stock isn't a wonderful idea. Most people should just be blindly investing x% of their income in a robot-…

Don't bash the Employee Stock Purchase Plan without getting more info though. Maximizing that and immediately selling (i.e. I never actually held my company's stock) netted me about $10k over the course of a year. The standard ESPP rules (buy at price today or price 6 months ago whichever is lower at a 15% discount with immediate selling) are even more advantageous than 401k rules but not all are standard.