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Options are inherently risky and should be accepted as compensation with the knowledge that there is a non-zero chance that they might turn out to be worth noth

by giaour 10y ago

Options are inherently risky and should be accepted as compensation with the knowledge that there is a non-zero chance that they might turn out to be worth nothing. What's described in the article is an interesting way for those options to be effectively worthless, but it's not materially different (for an option-holding employee without unlimited means) from Uber going bankrupt or having all unvested options cancelled as part of an acquisition. If an employee wants guaranteed compensation, they can negotiate for a cash-only package. If they want stock-based compensation that is not vulnerable to this particular loophole, they can go work for a publicly traded company that hands out RSUs.

williamscales 10y ago
The twist here is that the options end up worthless despite the hard work of the employee that leads the company to be successful. The options are supposed to incentivise this. Something about the incentive structure is wonky---in the case of Uber going bankrupt then the options "should" be worthless. But if Uber succeeds, then the incentive should pay out.
- quanticle 10y ago
  But options can end up (near) worthless anyway, for a number of other reasons. The company could go bankrupt. It could a new set of preferred shares that take priority over the current shares. It could get bought for a pittance. Granted, few of these probably apply to Uber, but they are all things that happen to companies in the broader space of start-ups. The reason we're focusing on the 90-day clock for exercising options (and the attendant bill) is that it's something that happens to a single employee when he or she leaves the company, as opposed to something that affects all the employees all at once. But I'm not sure that changes the aggregate analysis. It feels different, but I'm not sure that it is different. When you an employee joins a start-up, he or she is taking a risk that part of their compensation could end up worthless. The corresponding reward for that risk is the chance for that compensation to be worth beyond their wildest imaginings. If that risk/reward ratio is not to their liking... well, Google is hiring, aren't they?
  - williamscales 10y ago
    I agree. I think that extending the exercise period to something like seven years (as suggested elsewhere) would essentially fix this problem at the individual employee level. The employee shouldn't face risk that their option will end up worthless just because he or she makes the fairly reasonable decision to seek employment elsewhere.
- mirimir 10y ago
  That makes sense to me? So have options just become a total con?
  - giaour 10y ago
    I always thought they were a scam, but some people do get rich with them. (Fun fact: the above sentence is also true about lottery tickets and shares in a Ponzi fund.)

by giaour 10y ago

williamscales 10y ago

The twist here is that the options end up worthless despite the hard work of the employee that leads the company to be successful. The options are supposed to incentivise this. Something about the incentive structure is wonky---in the case of Uber going bankrupt then the options "should" be worthless. But if Uber succeeds, then the incentive should pay out.

quanticle 10y ago
But options can end up (near) worthless anyway, for a number of other reasons. The company could go bankrupt. It could a new set of preferred shares that take priority over the current shares. It could get bought for a pittance. Granted, few of these probably apply to Uber, but they are all things that happen to companies in the broader space of start-ups. The reason we're focusing on the 90-day clock for exercising options (and the attendant bill) is that it's something that happens to a single employee when he or she leaves the company, as opposed to something that affects all the employees all at once. But I'm not sure that changes the aggregate analysis. It feels different, but I'm not sure that it is different. When you an employee joins a start-up, he or she is taking a risk that part of their compensation could end up worthless. The corresponding reward for that risk is the chance for that compensation to be worth beyond their wildest imaginings. If that risk/reward ratio is not to their liking... well, Google is hiring, aren't they?
- williamscales 10y ago
  I agree. I think that extending the exercise period to something like seven years (as suggested elsewhere) would essentially fix this problem at the individual employee level. The employee shouldn't face risk that their option will end up worthless just because he or she makes the fairly reasonable decision to seek employment elsewhere.
mirimir 10y ago
That makes sense to me? So have options just become a total con?
- giaour 10y ago
  I always thought they were a scam, but some people do get rich with them. (Fun fact: the above sentence is also true about lottery tickets and shares in a Ponzi fund.)