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The author makes an interesting point about equity as lottery tickets. "They call stock options a lottery ticket. I call it insurance. It sucks to have worked

The author makes an interesting point about equity as lottery tickets. "They call stock options a lottery ticket. I call it insurance. It sucks to have worked at a startup which did make it big and to not have made anything off it. Incidentally, I know quite a lot of people who either forfeited their stock options or sold them very cheaply, on the theory that equity is worthless. Trust me, if you're working for a startup, this is the one accident you want to be insured against." Calling it "insurance" is probably taking it too far, but there is merit to this analogy, and it certainly is the case that equity is not worthless. With many startups, you can negotiate a decent base salary, and still receive enough equity to make you very well of if the company does take off.

ndonnellan 11y ago
I took away this: if you're neither negotiating a higher salary nor equity, you're setting yourself up for disappointment. Also, always negotiate from a positive perspective. It's much more powerful to say "I believe in this company, I would like more equity in exchange for the value I provide" instead of "I don't believe in unicorns, give me cold hard cash". Especially if you know the extra salary will be hard to come by. Your mileage may vary. I work at an established company now after a working at a startup where multiple life-saving investment rounds wiped out common shareholders (several times).
hkmurakami 11y ago
IMO, "equity is worthless" is an extreme approximation that is designed to psychologically protect the optimist startup employee from making potentially very poor financial decisions. Suboptimal, but a decent self protection strategy.
- _yosefk 11y ago
  Trouble is, I know a lot of people who used this extreme approximation to their detriment. In general, there's a huge difference between "worthless" and "cheap". If it's cheap, you might want to get more of it - and then it's valuable. If it's truly worthless, getting more does not help. That's how multiplication works with small numbers and with zero. Zero is a special small number. So I claim that "equity is cheaper than they make it sound" is absolutely the right thing to say to yourself (not to the employer), while "equity is worthless" is a terrible thing to say to yourself if you then stay at the place. (It's potentially a sensible thing to say to yourself if you intend to leave, and especially if you're leaving for something that looks both good and not that risky.)
thedufer 11y ago
The point of insurance is to decrease volatility. Stock options do the opposite of this. I don't understand how this comparison makes any sense.
- jasode 11y ago
  I wouldn't say there is any singular "point" to insurance such as "decreasing volatility". People buy insurance for multiple reasons. If a couple buys "trip insurance", it's more about managing risk and uncertainty so they can sleep at night if their cruise ship is cancelled rather than smoothing over price volatility. Also, I'd just read the parent's quote about "insurance" as a rhetorical device[1] rather than some rigorous financial instrument. The author thought of SOs as "insurance" against missing out on potential upside. [1] both "insurance" and "lottery ticket" to describe stock options are analogies/metaphors
  - thedufer 11y ago
    > If a couple buys "trip insurance", it's more about managing risk and uncertainty so they can sleep at night if their cruise ship is cancelled rather than smoothing over price volatility. To rephrase, they're definitely paying a small amount of money to avoid maybe losing a large amount of money. That sounds like the definition of decreasing volatility to me.
- brockwhittaker 11y ago
  This is not correct. Stock options can decrease volatility and serve as insurance against large increases or decreases. That is the point of hedging. For example if I have 100 shares of AAPL @108 and I'm nervous of it dropping below $80 in the near future, I may buy a MAR16 put option at $90/share for a few pennies in the hopes that if the stock does actually decrease to a level that makes me feel uncomfortable, the options will increase enough to offset the stock loses. So they very much can be insurance. It just depends on how you play them.
  - rahimnathwani 11y ago
    Your comment makes sense if you're talking about using publicly-traded derivatives to hedge long or short positions in a diversified portfolio. The comment to which you replied was talking about employee stock options, which are not generally used to hedge a short position, and often represent a large part of someone's overall wealth and/or income.
michaelbuckbee 11y ago
I like to think of equity as a "buyout bonus" - it's nice, sure would like to get more of it, but not something to plan for as there are just so many aspects of it out of your control.
decker 11y ago
Maybe the community needs to de-conflate positions (the options) and strategy (lottery ticket, insurance, etc).

ndonnellan 11y ago

I took away this: if you're neither negotiating a higher salary nor equity, you're setting yourself up for disappointment. Also, always negotiate from a positive perspective. It's much more powerful to say "I believe in this company, I would like more equity in exchange for the value I provide" instead of "I don't believe in unicorns, give me cold hard cash". Especially if you know the extra salary will be hard to come by. Your mileage may vary. I work at an established company now after a working at a startup where multiple life-saving investment rounds wiped out common shareholders (several times).

hkmurakami 11y ago

IMO, "equity is worthless" is an extreme approximation that is designed to psychologically protect the optimist startup employee from making potentially very poor financial decisions. Suboptimal, but a decent self protection strategy.

_yosefk 11y ago
Trouble is, I know a lot of people who used this extreme approximation to their detriment. In general, there's a huge difference between "worthless" and "cheap". If it's cheap, you might want to get more of it - and then it's valuable. If it's truly worthless, getting more does not help. That's how multiplication works with small numbers and with zero. Zero is a special small number. So I claim that "equity is cheaper than they make it sound" is absolutely the right thing to say to yourself (not to the employer), while "equity is worthless" is a terrible thing to say to yourself if you then stay at the place. (It's potentially a sensible thing to say to yourself if you intend to leave, and especially if you're leaving for something that looks both good and not that risky.)

thedufer 11y ago

The point of insurance is to decrease volatility. Stock options do the opposite of this. I don't understand how this comparison makes any sense.

jasode 11y ago
I wouldn't say there is any singular "point" to insurance such as "decreasing volatility". People buy insurance for multiple reasons. If a couple buys "trip insurance", it's more about managing risk and uncertainty so they can sleep at night if their cruise ship is cancelled rather than smoothing over price volatility. Also, I'd just read the parent's quote about "insurance" as a rhetorical device[1] rather than some rigorous financial instrument. The author thought of SOs as "insurance" against missing out on potential upside. [1] both "insurance" and "lottery ticket" to describe stock options are analogies/metaphors
- thedufer 11y ago
  > If a couple buys "trip insurance", it's more about managing risk and uncertainty so they can sleep at night if their cruise ship is cancelled rather than smoothing over price volatility. To rephrase, they're definitely paying a small amount of money to avoid maybe losing a large amount of money. That sounds like the definition of decreasing volatility to me.
brockwhittaker 11y ago
This is not correct. Stock options can decrease volatility and serve as insurance against large increases or decreases. That is the point of hedging. For example if I have 100 shares of AAPL @108 and I'm nervous of it dropping below $80 in the near future, I may buy a MAR16 put option at $90/share for a few pennies in the hopes that if the stock does actually decrease to a level that makes me feel uncomfortable, the options will increase enough to offset the stock loses. So they very much can be insurance. It just depends on how you play them.
- rahimnathwani 11y ago
  Your comment makes sense if you're talking about using publicly-traded derivatives to hedge long or short positions in a diversified portfolio. The comment to which you replied was talking about employee stock options, which are not generally used to hedge a short position, and often represent a large part of someone's overall wealth and/or income.

michaelbuckbee 11y ago

I like to think of equity as a "buyout bonus" - it's nice, sure would like to get more of it, but not something to plan for as there are just so many aspects of it out of your control.

decker 11y ago

Maybe the community needs to de-conflate positions (the options) and strategy (lottery ticket, insurance, etc).