[HN Gopher] The Guide to Stock Options Conversations
___________________________________________________________________
The Guide to Stock Options Conversations
Author : redbell
Score : 119 points
Date : 2024-04-14 12:45 UTC (10 hours ago)
(HTM) web link (zaidesanton.substack.com)
(TXT) w3m dump (zaidesanton.substack.com)
| hobs wrote:
| Why are conversations not like this? Because shady folks want to
| take advantage of people's enthusiasm about maybe striking it
| rich and do what they can to let the target's imagination do the
| work.
| earnesti wrote:
| I think the most common reason is, that people just want to
| avoid uncomfortable conversations. Back in the days I was a
| startup founder, my beliefs were always pretty different from
| the other stakeholders, and in the end everyone takes their own
| risks. Having this kind of conversation can be easily
| interpreted as a recommendation or discouragement, and I wanted
| to do neither. And while you can also explain the
| technicalities etc, in the end many people just want the answer
| "what should I do" from someone.
| riehwvfbk wrote:
| There's a reason these uncomfortable conversations are
| uncomfortable, and it's precisely that: you, as a founder,
| know that the odds of the employee striking it rich are slim,
| but have to sell them on joining the company.
| lucas_the_human wrote:
| In comp packages you also want to look for the exercise window
| clause. Some companies say you have to exercise your options
| within 90 days from leaving but I've worked at a startup where it
| was 5 years which is more employee friendly.
| gumby wrote:
| I was counseled years ago to be VERY careful about these
| conversations. You can't encourage, or come off as encouraging,
| any employee to exercise or not -- if the bet goes the wrong way
| (company succeeds but empmdidnt exercise or vice versa) you / the
| company could be sued and it's an SEC violation.
|
| One thing you should do is support early exercise (meaning
| exercise any time, even before you've vested; company can
| repurchase and the same price any unvested shares if you leave).
| This is especially good for early hires when the price is
| extremely low and 83(b) means you avoid a tax bill until you
| sell. In later stage companies this doesn't help as much though.
|
| I do agree with the author that comp secrecy is not just stupid
| but destructive.
| hackernewds wrote:
| tax bill before you sell scenario is valid for ISO. NSOs is a
| whole other ballgame, with its own tax benefits
| jawns wrote:
| > The "Assume your equity will be worth nothing" mantra.
| Especially in 2024, people prefer to treat stock options as a
| lottery ticket and not as an investment.
|
| The post itself provides ample evidence for why this is a
| rational position, especially for people with even mild risk
| aversion.
|
| For instance, look at the table of "Startups that exited for more
| than they raised." Even among those who raised a Series E or
| later -- the most likely to exit -- only 40% experienced a
| favorable exit, and among those, the mean valuation growth was
| 2.26X.
|
| Under optimistic assumptions, that's a "double your money"
| scenario with 40% odds, which is a not even a great bet in the
| aggregate -- but a pretty terrible bet for any individual.
|
| Financial advisors counsel people all the time not to put their
| eggs in one basket. That's why index funds like VTI are so
| popular. They let you diversify your investments.
|
| Heck, putting so many eggs into the basket of your employer is
| risky even after it goes public! I had a publicly traded employer
| who had a 401(k) match paid in company stock. Every pay period, I
| sold that stock and bought index funds instead.
| throwarayes wrote:
| Ugh yeah I turned down a job offer even from seemingly ethical
| and nice startup in large part because I'd be exchanging actual
| publicly traded RSU vesting in the future with equivalent in
| options.
|
| It's hard to trade in somewhat certain money for likely
| fictional Stock Options. Though I'd possibly trade RSUs from
| company A for company B.
|
| There's almost like a two tier employment system between those
| at FAANG or adjacent with actual likelihood of a healthy payout
| and those with options / lottery tickets.
| cbsmith wrote:
| > Ugh yeah I turned down a job offer even from seemingly
| ethical and nice startup in large part because I'd be
| exchanging actual publicly traded RSU vesting in the future
| with equivalent in options.
|
| I did the same thing. The options were from a company that
| had just IPO'd named Google. You may have heard of it. ;-)
| hibikir wrote:
| Yeah, the gamble only pays off for a company that has a
| growth so strong, and a plan so safe that the downside is
| quite low. They have to give you more options because they
| know they are worse than RSUs, so the pay really can end up
| being higher than FAANG, but still with some gambling
| involved. Those companies exist (See, Stripe 10 years ago),
| but there are so few of those, it's harder to find them than
| just go to FAANG.
| hackernewds wrote:
| 40% chance to double your money in 4 years is an expected value
| of 20% compound growth a year. Seems like a solid bet vs VTI
| dahinds wrote:
| Your calculation assumes that the other 60% of the time you
| get to keep your original investment, but there's a good
| chance that you lose it all.
|
| This is also the calculation for an investor, and is not
| really relevant for an employee option holder.
| thedufer wrote:
| In fact, it sounds like the 40% includes all exits,
| including those that returned only 1x. That would mean that
| the 60% is all 0s, and that the chart shows a negative
| total return in all rows, without even discounting for the
| holding period.
| jawns wrote:
| But the way it works per individual is that you have a 40%
| chance of "winning" and a 60% chance of losing your
| investment completely.
|
| VTI carries the risk that your investment could lose value in
| the short term, but over a longer time period, I'll take VTI
| over stock options any day.
| deschutes wrote:
| Better odds and no work at a game of chance. That's pretty
| damning.
| lostemptations5 wrote:
| This really depends on an individuals risk tolerance.
| baq wrote:
| Volatility adjusted is probably quite shit.
| repsilat wrote:
| This math is way off. _Guaranteed_ doubling in 4 years is a
| 19% per annum return. If the "not doubling" case is "break
| even" (generous) then the expected growth is under 10% per
| annum.
| dan-robertson wrote:
| Yeah, the real reason that kind of advice is useful for lots of
| people is that those people aren't risk neutral. It's also hard
| to value the options correctly. There're a bunch of reasonable
| things Ben Kuhn has written about startup stock options, with
| the main premise being that if your salary suffices and you
| intend to give the rest to charity (and want to increase the
| amount you give) then you are risk neutral and so you should
| try to value the options properly. Eg this post and several
| linked from it: https://www.benkuhn.net/offer/
| dasil003 wrote:
| > _Financial advisors counsel people all the time not to put
| their eggs in one basket._
|
| One nuanced take that I've found useful: diversify to preserve
| wealth, but concentrate to build it.
|
| To be clear, I'm not advocating against the default view that
| stock options are lottery tickets, because from a pure
| financial point of view that's close enough to the truth.
| However, it's important to understand that outlier wealth comes
| from ownership of businesses, and the whole point of being at
| an early stage startup (whether as founder or early employee)
| is to be an agent in the success of an outlier business.
|
| There's no way around the fact that this is a fundamentally
| risky proposition. The odds are always against you--especially
| given how much one can make in FAANG, it's a particularly
| difficult time to make any kind of expected-value argument for
| working at a startup. That said, there will be more outliers in
| the future. Many people who work on those will see generational
| wealth far exceeding the rank and file of FAANG. They will have
| gotten there via a drive to do something new and different, and
| working together to achieve something that the majority of
| rational people deemed impossible. Despite future dismissals
| about luck, or odds, or averages, or reproducibility, noone can
| take away what they will have accomplished through the sweat of
| their brows and choices made along the way in the face of
| massive uncertainty.
|
| Ultimately, the best reason to join (or found) a startup is
| because you really want to try to do a hard thing with a group
| of people you trust and admire enough to go into the trenches
| with for the next 2-5 years. It can pay off, but the mentality
| necessary for success is diametrically opposed to good
| financial advice.
| earnesti wrote:
| > The odds are always against you--especially given how much
| one can make in FAANG, it's a particularly difficult time to
| make any kind of expected-value argument for working at a
| startup.
|
| This kind of advice often assumes that it is easy for anyone
| to get a FAANG job. I got rich from a startup, before that I
| was working for a bigger companies and I'm very sure that I
| would never have been successful in that game. I'm fairly
| sure that corporate jobs work out for quite different
| persons.
| OtherShrezzing wrote:
| >This calculation doesn't take into account the dilution during
| future funding rounds.
|
| It's fairly useless to have these scenario planning conversations
| with your staff without describing dilution events - they're
| fairly inevitable. If you've told all the staff that there are
| three general scenarios, you're going to lose a lot of trust &
| goodwill when you hold the all-hands meeting where you announce
| "oh yeah, there's mystery scenario four, where your returns
| decrease in value, and there's nothing you can do about it, and
| we might do it again".
| bradlys wrote:
| Ultimately, dilution doesn't matter for 99% of employees. You
| could experience 10x dilution but if the price goes up 100x -
| you're still up 10x. Would it be great if you went up 100x and
| no dilution? Sure but that's not how it works.
| saulpw wrote:
| In actuality how it works is that the price goes up 10x and
| you experience 10x dilution. So everything seems up and to
| the right and the founders are 10x but when it comes time to
| cash out you're lucky to get a small bonus.
| bradlys wrote:
| Maybe in some cases but I often see founders getting
| diluted a lot as well.
|
| Many times when startups get acquired/whatever - founders
| will get next to nothing because the investors had
| liquidation preferences. The founders still go through with
| it though cause it allows you to start another company and
| raise rounds. If you become known as a founder who
| prioritizes himself over his investors - who is going to
| give you money...?
| datavirtue wrote:
| I don't think stock options should be seen as a retention
| incentive. Maybe they incentivize me to knock it out if the park
| but if I don't care about the company anymore at best they are
| "golden handcuffs" that prop up the illusion that the holders
| care about the company.
| whiplash451 wrote:
| Options conversations are hard for a good reason. The underlying
| mechanics are actually complex. You can't explain an employee
| what the outcome would be for them without telling them about
| preferential shares, double-dipping, etc. Good luck building a
| company on full transparency on all this. Most investors would
| think you're crazy and finance the startup next door.
| iamacyborg wrote:
| All you'd need to do is have a glossary and an open cap table,
| no?
| whiterknight wrote:
| I'll be satisfied with a market cap thanks. They won't even
| tell you how many shares there are.
| hbrav wrote:
| > In some companies, the initial job contracts are misleading,
| and mention a nominal price of $0.01.
|
| Is he suggesting that the initial job contract does _not_ state
| the exercise price, and relies on the employee mistakenly
| thinking that $0.01 is the exercise price?
|
| This seems like it stems for a culture that we have of employees
| (or potential employees) just never asking questions about
| contracts that are presented to them. And I think there's a lot
| of employers that expect that to be the case too. I've once had a
| manager tell me with a straight face when I requested changes to
| a contract "I'm sorry, I can't get this changed. You'll just have
| to sign it." My reply of "I don't believe it's in my interests to
| sign that" was not something that was in his world-view.
| bionsystem wrote:
| Could be a misread of certain 10K which state a par value of
| $0.01, which has no particular meaning at any point in time of
| the life of a company (it's just a convention).
| benjaminwootton wrote:
| I think there is way too much scope for bad actors in this. The
| employer holds all of the information and all of the cards.
|
| I was a tier 1 significant common shareholder in my own company
| and saw a bunch of shenanigans. The rank and file employee with
| 0.00X% stock options subject to weird rules and tax doesn't stand
| a chance.
|
| From the employees perspective, have to find a massive outlier in
| terms of company success and then hope to not get screwed or be
| diluted to hell. Lottery ticket odds are the right ballpark.
| spxneo wrote:
| whew thought this was a guide on how to avoid getting manipulated
| on social media into buying calls and puts after reading DDs
|
| i think best thing to do is not offer illiquid stock options but
| a sliding scale revenue share.
|
| Of all the startups that I have been a part of, only 1 found
| buyers for the stock options but even then it was too little
| because it didn't IPO, it just sold to another player.
|
| It's down right misleading to offer pieces of paper with the
| right to buy a stock that has almost nil chance of seeing
| retailers without disclosing the odds. The odds are close to nil
| for startups looking to IPO.
|
| By doing revenue share, it forces you to be long term orientated,
| you are now focused on growing a steady stream of net positive
| cash flow. This puts you in a much better negotiating position,
| you can use leverage from banks to get anywhere from 30~60 cents
| on the dollar, to redistribute back into operations or bonuses.
|
| THEN you can accept that invite from a VC or PE (dont recommend
| it due to the time constrained nature of PEs that are
| incompatible with long term orientated management) and absolutely
| have the odds in your favour.
| dsr_ wrote:
| "All the (unneeded) secrecy around the compensation package - you
| are not allowed to talk about your salary and stock options with
| other employees, and in some places not even with your manager."
|
| In the United States, this is not just unnecessary secrecy: this
| is completely illegal. Trying to forbid employee-to-employee
| conversations about compensation will land the company in
| trouble, and every manager should know this.
| rybosworld wrote:
| A company I worked at years ago, the VP of the department sat
| in on all of my annual reviews with my manager. He would mostly
| just listen in. But at the end of the meeting he would always
| say something to the effect of: "as you know, you can't discuss
| your compensation with coworkers." I knew it was illegal for
| him to say that but, if it's not in writing then there's
| basically no recourse.
|
| I understand this to be a fairly common experience in the U.S.
| workforce.
|
| When it comes to labor laws in particular, the rate of
| enforcement is extremely low.
| pizzafeelsright wrote:
| Why would you want to know what you're making compared to
| your coworkers?
|
| You agreed to the pay. Want more? Ask more. If you're making
| 2x more than your "peers" would you take a cut to equal pay?
| mym1990 wrote:
| The point is that there is an information imbalance, which
| enables one side to have more power in negotiating. Sure I
| can say "give me more money" but if the employer presumes I
| have little information on my co-workers, they can just say
| no. But if I call the bluff and say, I want more money
| because I know a co-worker makes X, it is harder to say no
| for the employer, although obviously not impossible.
| pizzafeelsright wrote:
| The employer doesn't know how much you'll work, if you'll
| quit early or give up or make mistakes or not bother to
| show up.
|
| Information is missing on both sides.
|
| Contracts are open with all Information available. To
| that route if you're wanting to make more than the W2
| ethbr1 wrote:
| Keeping employees from discussing compensation is the
| easiest way for employers to undercompensate employees (and
| avoid keeping pace with the market).
| pizzafeelsright wrote:
| The market is the average and the market is always open.
| gopher_space wrote:
| I'm trying to minimize my labor while maximizing my income,
| within a system designed to produce asymmetrical
| information.
| pizzafeelsright wrote:
| You're trading your skills, time, and experience without
| taking the risk of capital and legal risks.
| ToValueFunfetti wrote:
| Sure, and we're trading it for money. If the question is
| "why would you want to know what your coworkers make",
| the answer is "so I can leverage that information during
| negotiation for more compensation". If the question is
| "why wouldn't you want to optimize for your employers'
| ROI, considering they take on all of the risk", then I
| wonder why you suggested it would be absurd to take a 50%
| paycut.
| gopher_space wrote:
| Like everyone else in the Limited Liability Corporation?
| Doesn't that make me _wise_?
| peteradio wrote:
| Because you don't have a clue what the market will bear.
| SilasX wrote:
| >he would always say something to the effect of: "as you
| know, you can't discuss your compensation with coworkers." I
| knew it was illegal for him to say that but, if it's not in
| writing then there's basically no recourse.
|
| Follow-up email: "Thanks for the helpful feedback in the
| review! And yes, as instructed, I would never dream of
| talking to co-workers about compensation. I know that's
| against policy."
|
| Then, either he puts in writing that it's not policy, or
| you've started a paper trail.
| usrnm wrote:
| You're also fired. Nothing wrong with that, just saying
| sgtnoodle wrote:
| In my experience, a culture of radical employee-driven
| compensation transparency can lead to toxicity. A subset of
| folk have a tendency to become obsessed, and increasingly more
| resentful about their particular notion of fairness. Then from
| that, folk start to play the victim, grasping for explanations
| that don't require introspection or admitting individual
| responsibility. In that environment, the company is forced to
| take a defensive position, which makes the culture even more
| toxic.
|
| What I've seen work well is the company taking pro-active steps
| to be transparent about compensation in aggregate. For example,
| HR can put out a periodic report documenting compensation
| metrics by job title and experience. They can also slice the
| data along various social factors to quantitatively show
| whether there's any indicators of unintentional bias. From
| there, another good idea is for the company to regularly apply
| adjustments independent from performance, in order to keep the
| metrics healthy.
| whiterknight wrote:
| Your first paragraph kind of describes employees behavior in
| general.
| latchkey wrote:
| I've been in the tech industry for 30 years. I've also been
| mostly startup based my entire time.
|
| I've only ever had options "work out" a single time and that was
| because long after I left the company (I bought my vested
| options), it went public and my options converted into actual
| stock. However, the stock was absolute shit worthless for about
| 10 years, so I hung onto it thinking one day, I'd sell it and
| harvest the tax loss. Then, during covid, WSB came along and
| randomly pumped it and my limit order for the very tip of the
| market, was actually filled. Much to my amazement. Then, the
| stock went to the bottom again almost the next day. I think I
| "profited" about $5k total out of that deal across many years.
|
| My last company, was supposed to go through a SPAC, likely so
| that the execs could dump on retail. I spent like $30k on my
| options and near the end of everything in the hopes of getting
| some of it back, the whole deal fell through and I got laid off
| for the first time in my career.
|
| Maybe I just have bad luck in these things, but every time I
| picked a higher salary over more options... it worked out better
| in the long run, by a lot.
|
| Now that I'm CEO of my own business, I have zero plans to ever go
| public or even sell the company. I'd much rather have it be
| focused on stable revenue generation, and make sure to pay people
| well, and give company performance bonuses along the way. Yes, of
| course, we will also give options out, as the industry expects
| it, but I'm not going to make it a focus (by preferring good
| salaries, benefits and a stable gig). I'll be upfront about my
| plans for anyone joining. I would much rather be real with people
| than give them any sort of false hope. We are just starting, so
| let's see how that works out over time.
| bradlys wrote:
| It's a really fucking bad time to be joining startups. They're
| picky, offering shit comp on top of it, and have very little
| chance of a sizable liquidation event for employees in a long
| time.
|
| Idk if I'll join a startup again in the next few years. It's
| basically taking salary only - which can be anywhere from 1/2-1/4
| of my normal pay. Why waste your time?
|
| I hope one day startups will offer something of value again. For
| now, it's a race to the bottom.
| cmmeur01 wrote:
| I think it's more complicated than that and one big factor is
| location.
|
| In my midwestern experience startups are paying more cash than
| other businesses where software is a cost center.
| bradlys wrote:
| Well, sure. I'm talking mostly about the US coasts where most
| of the YC audience is. HN is a very SV focused website.
| JonChesterfield wrote:
| Whoa no. Absolutely no telling employees the details. The whole
| point of stock options is that employees can't value them
| accurately and you probably don't have to pay them.
|
| That's the whole magic trick. Come work for us! We can only pay
| $50k in boring everyday money, but here's some tokens. We don't
| know what they're worth, and you can't spend them for many years
| or maybe not at all, but look at this picture suggesting they
| might be worth lots! Works really well on people new to the
| workforce.
|
| Actually giving employees a means of valuing it, notably that
| their options turn into a class of shares that get paid after
| lots of other people and a sketch of how dilution works out in
| the meantime, stops them thinking it's a lottery ticket. It
| becomes a very low chance of winning less money than the
| opportunity cost relative to working elsewhere.
|
| Much more fun for employees are RSUs. They have the same nice
| trick of becoming free when people quit. They let you adjust
| people's pay without annoying them as much as a salary freeze or
| reduction. A three or four year vesting period with roughly
| annual grants is near perfect as a salary retention tool.
|
| Also rsu induced pay inflation has really hurt the startup
| recruitment pitch which helps defang an existential threat to
| your public company.
|
| Not really what I want as an engineer but the incentive gradient
| is very clear.
| rustcleaner wrote:
| >That's the whole magic trick. Come work for us! We can only
| pay $50k in boring everyday money, but here's some tokens. We
| don't know what they're worth, and you can't spend them for
| many years or maybe not at all, but look at this picture
| suggesting they might be worth lots! Works really well on
| people new to the workforce.
|
| If I have to be short theta, at least be a [company] man and
| make it something like 75-delta >720 DTE calls. Ideally let me
| sell 50-delta <360 DTEs to the new on-boards as well! :^)
|
| Long longer dated ITM calls protect downside in IV spike, and
| being short shorter (relatively) dated ATM calls pays me more
| theta than I pay for the ITM while the ITM gives me much needed
| vanna if the underlying shits the bed on my spread (assuming
| skew exists).
| rustcleaner wrote:
| The above is a diagonal. Another option could be to be in an
| equivalent vertical (both shorter expiry) and then long a 2-5
| delta back-dated put to get vanna for downside protection.
| jjav wrote:
| There are IMO two points in time where joining a startup makes
| sense.
|
| One is very early, _iff_ the startup supports early exercise.
| Join, immediately do an early exercise of all your options and
| file an 83(b). This only makes sense if you join so early that
| you can afford to exercise all those options for an amount of
| money that you won 't mind losing if the company goes nowhere.
| Typically this only makes sense if the exercise price is in the
| few pennies range (but depends on your finances). So before a
| series A at the very latest.
|
| This is good because you can now work there are long as you
| want but you are also free to leave if things become
| unpleasant. As long as you spent at least a year there, any
| shares you vested prior to leaving are yours for good. If the
| company IPOs many years after you leave, you still get
| something.
|
| The other good time is when the company is already large and
| well-known and clearly on the path to an IPO. You'll get far
| less ownership obviously, but probabily of success is much
| higher.
|
| The worst time to join a startup is anywhere in between. The
| exercise price of your options is too high on day 1 you can't
| afford to buy them, then you work there for years and become
| vested on paper but can't do anything about it, then you leave
| prior to an IPO and you still can't afford to buy the options
| so they cancel and you are left with nothing.
|
| I've done each of these scenarios, some more than once.
| robocat wrote:
| If you want to spend money on startup shares, why wouldn't
| you buy preferential shares? The median value of common
| shares is muck - converting options buys you risky common
| shares and causes tax liabilities.
|
| Angel investing is extremely risky, and converting options is
| riskier than that! Common shares are much much higher risk
| than preferential shares.
|
| Plus diversification is good. Concentrating your assets and
| job into one investment is speculation: great when you win
| but terrible when you lose.
|
| I reckon we are conceited to think we can invest smarter than
| professional VCs? They lose all the time even though it is
| their fulltime job and they are insiders on the rules of the
| game.
| Glyptodon wrote:
| There really isn't much tax liability for exercising
| options when the fair market price is still minimal unless
| you have an awful lot of them.
| jjav wrote:
| You'd want to buy when exercise price and FMV price are
| the same, so quantity doesn't matter.
| robocat wrote:
| Returns are highly skewed.
|
| If your prior is: exercise price and Fair Market Value
| are equal, my bet would be that the shares are most
| likely loser shares.
|
| Winning shares are much more likely to have a fair market
| value that exceeds the option exercise price.
|
| The rules of the game are written by the winners!
| jjav wrote:
| > why wouldn't you buy preferential shares?
|
| I'm left with the sense that this is a response to some
| other post, not mine?
|
| To be clear, I'm talking about scenarios where one would
| join a startup as a regular employee. Not talking about
| angel investing or anything like that.
| robocat wrote:
| I am just saying that common shares are extremely high
| risk investments. When you start putting money into an
| investment I believe you should aim to get the same risk
| profile as other investors that are putting money in. If
| exercising your shares is a trivial cost, then it doesn't
| matter. If exercising shares costs a lot then it really
| really matters.
|
| Common shares have zero value until after the
| preferential shares are in the money. i.e. buying common
| shares is as risky as investing in call options.
|
| Angel investing is extreme risk, call options are extreme
| risk, and as a sweeping generalisation: common shares are
| riskier than those. I'm only mentioning Angel investing
| because we all know how risky that is, so it is a
| baseline to compare against.
|
| You answered JonChesterfield who's point was "here's some
| tokens". Your reply is entirely sensible and you are
| rightly saying those tokens can end up winning and you
| explain a good strategy to get valuable tokens and gamble
| some of your pot.
|
| I am attempting to amplify JonChesterfield's comment,
| perhaps I'm failing!
|
| Aside: I really appreciate your comment and I am
| commenting to help my own thinking. I have been trending
| towards doing Angel investments which requires
| understanding VC incentives. I'm past being an employee
| so I'm not sure how relevant my comments are to anyone!
| VCs and the VC ecosystem use the confusion between the
| details of public market shares, common shares, and
| preferential shares to the advantage of the VCs.
| nilram wrote:
| Any more, I'd rather they just gave me lottery tickets. My
| payout rate has been the same.
| tossandthrow wrote:
| Tbh, I would never go below market rate in real money
| indifferent to what equity deals I am provided. But a nice,
| liveable, just above market rate salary + some stock. I don't
| shy back from that.
| theogravity wrote:
| Surprised it didn't mention anything about AMT, which may prevent
| one from exercising because they can't afford the tax hit from
| the spread.
| mancerayder wrote:
| Is it that bad? I'm on a relatively reduced salary due to ISOs in
| a company that wants to exit in the next couple of years, and a
| stock valuation that keeps going up (per audits) in the last
| years. It's also still expanding quickly. The company even did a
| raise and let some of us sell a percentage of our shares to the
| private buyer.
|
| This is not Silicon Valley, but a fintech. Given I have not only
| my time but 10s of k of my money tied up in options due to strike
| price going up with each grant, in what way am I risking getting
| screwed?
|
| In the comments here, it seems like I have a 60+ percentage
| chance of getting screwed through a dilution or other. However it
| doesn't feel that way.
|
| What should I be on the lookout for? The Paperwork is dozens of
| pages long and I'm not an attorney.
| fragmede wrote:
| I'm not an attorney either. The best way to answer the question
| is to find one that specializes in this arena, and ask them,
| rather than believe anything you read on the Internet, or from
| an LLM. Still, the whole thing could just go to zero. The
| finteching doesn't work out and the company and thus your
| options become worth zero. I hope that doesn't happen for you,
| but before dilution, you have up look at that as a very real
| possibility. Something could pivot out from under you and it
| could just stop working and being worth anything.
|
| Once you've stared that beast in the face, yeah, dilution is a
| thing that could happen, but it's not in anyone's interest to
| screw you over. If you get screwed over by your board, people
| are going to know, and not want to work with those people ever
| again. So dilution absolutely happens, but you just have you
| hope you're not gonna get screwed over. There's no legal
| guarantee that you won't though, so that's why the common
| advice is that that options are worth $0, until they aren't. So
| you have to look at options as a lottery ticket and ask how
| much you like the work and how much you like your coworkers,
| how much you like what the company does, and can you live off
| the pay you do get.
| pyrophane wrote:
| Well, for the most part you agreed to your employer's stock
| plan when you were granted options, and so you are subject to
| whatever is in there but there isn't a lot you can do about
| that since you would have already signed it a while back.
|
| I would just refer to an attorney regarding anything would
| modify your shares or the agreement you already signed, because
| those things can't be arbitrarily modified without your
| consent.
|
| Also, the most common way employees get "screwed" is when the
| company underperforms and has to raise money on bad terms, but
| there isn't much you can do about that.
| neilk wrote:
| There is no discussion of how the employees are the last to be
| paid, after founder class shares and investor liquidation
| preferences are settled.
|
| Borders on misinformation to tell people that owning x% in shares
| equals x% of liquidity event. Even many founders end up with very
| little to show from an acquisition.
| pyrophane wrote:
| I don't think founders typically get liquidation preference
| like VCs do, but correct me please if I'm wrong.
| seanhunter wrote:
| An article about startup employee stock options that doesn't
| mention the effect of liquidation prefs and only mentions
| dilution extremely briefly is really missing a huge amount of
| what anyone needs to actually value stock options. On a quick
| scan this doesn't look terrible [1], although it's focussed on
| the founder's perspective rather than the employee's.
|
| [1] https://www.joinarc.com/guides/liquidation-preferences
| entangledqubit wrote:
| I would avoid this guide. I don't even see mentions about
| dilution and cap tables, let alone preference and a bunch of
| other risks.
|
| If you need a solid guide, I usually point at the Holloway Guide
| To Equity Compensation but I'm annoyed that it looks like they
| started charging for it (probably still worth both the time and
| money). The preview is worth checking out. That being said, I
| think there are a bunch of other aspects that aren't captured.
|
| I was under the impression that founders/management generally
| don't give any company specific guidance in order to not be on
| the hook for anything that may be construed as guidance or
| promises.
| siliconc0w wrote:
| Startups are great when you're looking for a fast-paced high-
| trust environment where you're going to be given a lot of
| responsibility and will be able to grow your skillset. From a
| financial perspective, they're terrible unless you're an early
| employee or possibly a very senior/exec hire. Rarely companies
| might offer things like longer exercise windows but even then
| your options can become worthless even in an unlikely successful
| exit due to dilution/liquidation-prefs.
| surfingdino wrote:
| It's worth pointing out that this post is written from the point
| of view of a US startup. If you are in the UK, just say no to
| stock options and ask for a salary that matches the market. UK
| startups keep on trying to get people to work for less with the
| promise of stock options despite there being little recent
| evidence of UK startups IPO-ing. I got screwed on startup stock
| options in the past, but not as badly as people who invested 5+
| years of their lives into the company. The founder got enough to
| not have to work for the rest of his life, but the employees got
| zero pennies when the business was sold to competition. Stock
| options are not even a gamble, they are an IQ test, if you accept
| them you have failed.
| nickjj wrote:
| I'm surprised the post doesn't mention a specific type of risk
| which is out of your control.
|
| I'm not well versed in options lingo, is there something to
| describe this scenario?
|
| You join with a very low strike price, such as $0.05 and get a
| lot of shares, let's say 200k to keep the math easy. At that
| strike price the value on paper is $10,000.
|
| Then a liquidity event occurs before your options vest and now
| instead of 200k shares @ $0.05 you have 3,333 shares at $3.00
| because the valuation of the company changed. You still have
| $10,000 in options.
|
| The issue now is you've taken a huge loss in the multiplier
| effect. Having a stock go from $0.05 to $1 is a 20x jump. Hitting
| that would yield $200,000 in value.
|
| But the odds of $3 turning into $60 is so much lower, but that's
| what you would need the stock to hit to yield the same return in
| the end.
|
| In the end, over time you tend to get less stocks at a higher
| adjusted strike price with no real-world opportunity to exercise.
| Sometimes even if you have vested options you can only exercise a
| single digit percentage of your total shares so the total cash-
| out value is the equivalent of 1 day's worth of pay even after
| years of vested options.
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