[HN Gopher] Stock Options are like lottery tickets?
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Stock Options are like lottery tickets?
Author : hunterwalk
Score : 11 points
Date : 2024-05-11 16:47 UTC (6 hours ago)
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| JumpCrisscross wrote:
| 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. Those options are straight-up compensation with
| a variable component.
|
| Systemically, employee stock options are totally unlike lotteries
| in that they're part of a positive-sum system.
| toomuchtodo wrote:
| Where do you delineate between early and late stage? Series A?
|
| Edit: Thank you!
| JumpCrisscross wrote:
| > _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 couldn't find failure probabilities by VC
| round or capital raised, so this is probably conservative
| inasmuch as small businesses fail at a higher rate than
| venture-backed companies.)
|
| [1] https://www.bls.gov/bdm/us_age_naics_00_table7.txt
| alephnerd wrote:
| 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.
| metadat wrote:
| 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.
| JumpCrisscross wrote:
| > _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).
| alephnerd wrote:
| > 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
| metrics work.
| foobarkey wrote:
| I think there is a sweet spot between risk and expected value,
| ideally earlier before the IPO looks like an obvious next step.
| Won't be retirement levels of money in one go but I would say it
| is more like 80/20 (success/failure) in that case.
|
| Gambling is only bad thing if the odds are not in your favor.
| boshalfoshal wrote:
| The thing is, at that point going to a larger public company
| would probably net you similar returns and less of the headache
| (immediately liquid compensation that you can invest into other
| things, no tail risk of option value suddenly becoming 0,
| likely better wlb, etc).
|
| Once it an "obvious" choice to join a startup then the
| valuation of the company is already close to fair, assuming you
| have about the same edge as VCs do when evaluating these
| companies. On IPO day it may jump up a bit from its last posted
| private valuation, but keep in mind once the company IPOs
| you're typically subjected to a 1-year lockup period, during
| which the value of the company could change drastically.
| tedunangst wrote:
| More like tickets to the ring toss.
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