5 ms·

What's the point of stock options? It's a piece of paper that allows you to buy stock if and when at a predetermined price. This price can be higher or lower, y

by cm3 10y ago

What's the point of stock options? It's a piece of paper that allows you to buy stock if and when at a predetermined price. This price can be higher or lower, you cannot know beforehand. It's not a replacement for a salary or a stake in the company. I was handed out stock options myself for a company in the past but it wasn't worth it to use them. I mean, unless you have options from a unicorn, those don't amount to much. I have this impression that some misrepresent options with stock.

dasil003 10y ago
The value of options has nothing to do with unicorn status. If you join an existing unicorn, especially a public company, then your options are no better than a roulette wheel—the valuation already has captured a large amount of savvy knowledge about the future of the company. Also, because it is so big you won't be able to move the needle anyway. The point of options is to take on some risk in exchange for bigger reward. To do this you can't come in with an employee mentality of wanting to get a market salary and have a lot of security, you need to start thinking like a business owner. It's easiest to do this as a founder where you have true control, but it's also possible to do so as an early employee / late co-founder, but in that case you have convince the founders/board of your value. Taking a lower salary in exchange for more equity is a concrete demonstration that you are thinking about the company's burn rate, and that you believe in your ability to help the company succeed. None of this is to justify founder's taking advantage of early employees, by all means stick up for yourself and know your value, but recognize that a computer programmer is not worth $100k a priori, you can spend all your time building things which are worthless. The trick with a company is figuring out how to turn that energy into business value. Founders take on the biggest risk of making that happen, and likewise they get the greatest control. Options with a vesting cliff are the mechanism for realizing that value creation, and rewarding an effort over time. Your ability to succeed with options will certainly be some amount of luck, but to maximize your chances you need an appetite for risk and the desire to build a great company rather than join a great company.
harryh 10y ago
The point of stock options is that they let the owner of said options participate in the success of the company. If the company is very successful, that participation can be quite a lot of money. If the company is not successful or only moderately successful it's unlikely to be much money at all.
- cm3 10y ago
  Of course, but it's just a bonus like high probability of success when you join a great team with a proven track record. You don't know if the price will be higher/lower and thus it's just that, a bonus at best. If you're expected to take more risks or lower salary, the usual and correct way it to be given a stake of the company.
  - harryh 10y ago
    It's not clear to my why you value stock grants so much more highly than stock options. They certainly can be in some circumstances (though in those cases they come with a healthy tax bill), but for early stage-ish startups there generally won't be a huge difference.
    - cm3 10y ago
      A stake in the company means I own part of it, usually 5 or 10 percent at minimum to attract technical talent. Options or stocks are harder to quantify.
    - rrdharan 10y ago
      I imagine you know this but the tax advantages for stock options aren't as clear cut as you make them sound. To make them more compelling than stock grants the options have to be ISOs, the spread on them has to be negligible or zero (to avoid a large AMT bill), the exercise cost has to be low enough that you are ok with handing over that amount of money up front, and you need to be able to actually hold the actual stock for long enough (at least 2 years from date of grant, and 1 year from date of exercise, to be counted as long-term capital gains). Note that on this last point if the company is acquired prior to that date you're likely SOL on the tax advantages. These days I much prefer RSUs. I've twice failed to reap the theoretical tax benefits from ISOs due to acquisition prior to the 2 year window, and I find RSUs much easier to reason about especially once option exercise costs become non-trivial (which is the case if you were to join many of the hot pre-IPO unicorns these days).
tdaltonc 10y ago
Here's one of the points of stock: If you want a stake in a company you have to buy it (it can't just be given to you). A lot of employees don't have the cash on hand to buy stock so companies issue options instead. And even if they did, they'd risk loosing that money. You can't loose money on an option. Here's another: Startups can get in trouble for selling stock to people who aren't 'accredited investor' (basically means "already rich"). This is changing, but it's still a problem.
- cm3 10y ago
  I've been offered a stake at a privately funded startup for a lower salary and that's reasonable and realistic. Had they offered me options instead I would have walked away sooner than I did. Trading salary for a stake is a gamble, but doing the same for options is like a quadruple mortgage.
  - ropiku 10y ago
    The problem with giving outright shares compared to options is you owe taxes on that. In the taxman view you got something (shares valued via 409A) on which you have to pay taxes even if the shares you got are not liquid.
    - jsprogrammer 10y ago
      I don't think becoming an owner is necessarily deferred compensation.
- delinka 10y ago
  Stock can indeed just be given to you via a "stock grant." The value at the time of the grant constitutes income (for the purposes of income tax calculations in the US.)
- cm3 10y ago
  I don't think the requirement to buy a stake is the same rule globally. I've heard of people who got a stake just for joining with a lower salary but didn't put money into the company, just their work.
deelowe 10y ago
> What's the point of stock options? I know it's hip with the kids to be cynical these days, but surely you jest... > It's a piece of paper The legal term is "contract." > This price can be higher or lower, you cannot know beforehand. Yep. That's kind of the point. Risk versus reward and all that. > It's not a replacement for a salary or a stake in the company. Not directly, no. Neither is health insurance, 401k, company provided meals or other benefits, but all of these things are perceived by most to have at least some marginal value. > I was handed out stock options myself for a company in the past but it wasn't worth it to use them. C'est la vie > I mean, unless you have options from a unicorn, those don't amount to much. Or, ya know, you end up with a company that has good growth potential and those options work out in your favor, which is actually typically the case btw. On average, the market has improved over time. I'm guessing you were burned either b/c the company was high risk (which means you had the potential to do VERY well conversely) or you were hit by the downturn which also affected almost all stock, so not really related to options in that case. > I have this impression that some misrepresent options with stock Then some are idiots for agreeing to something they don't understand.
- cm3 10y ago
  > > What's the point of stock options? > > I know it's hip with the kids to be cynical these days, but surely you jest... I've seen so many startups' career pages mention stock options as noteworthy alongside perks. Stock options are like a reservation at a poker table where you're allowed to join the game. > agreeing to something they don't understand it's more likely the bling of a startup overshadowing everything and that it's mostly less experienced and young people.
- ryanSrich 10y ago
  I agree with everything you said except for this part: > "Not directly, no. Neither is health insurance, 401k, company provided meals or other benefits, but all of these things are perceived by most to have at least some marginal value." Stock options are, 99% of the time, worth $0. Perks, benefits, retirement options, all have intrinsic monetary value.
  - 10y ago
maxerickson 10y ago
Options have different tax implications than stock. So for instance, an employee that gets a big pile of options in an illiquid stock doesn't necessarily experience a taxable event. This is good for the employee. If the stock later becomes liquid and worth a lot, the employee can exercise the options and cover any taxes by selling the resulting stock.
- Taniwha 10y ago
  however if you buy them while they are still valued at the option price you also don't experience a taxable event .... and you can lock in the purchase as a potential capital gain (and possibly pay lower tax when you do sell them) ... the down side is you've invested in something you probably can't get back until when (and if) it goes public. So the time I was a founder and got 100k options at 1c I bought the stock and started the capital gains clock ticking (but then lost the $1k when things crashed and burned). But when I got 10000 options at $1, I didn't buy them for $10k, but made $250k when the company went public -but paid tax at my marginal rate (43% in CA). You have to make choices depending on your circumstances and tolerance for risk
poof131 10y ago
Options are your right to equity or ownership of the company. So you experience some of the upside as well as risk some of the downside. The problem is equity is serving two purposes. On one hand, it represents ownership of the company, the ‘capital’. On the other hand, due to it’s favorable tax treatment, it has become a key component of compensation.[1] Marisa Meyer didn’t start or invest in Yahoo, but she is compensated almost $40m a year in equity, over 90% of her pay package.[2] When you are evaluating an offer between a startup and a larger company, regarding compensation you need to evaluate the whole package: salary, equity, and bonuses. Startups want to compare only salary and over value their equity. “You’re taking a 50% pay cut from Google, but we are giving you XXX in equity at our last valuation.” Look at the total pay packages with more realistic valuations such as a 409a for startups, and then examine the probability of different exits and how much you will make. There’s a reason people say employees are learning while founders are earning.[3] An honest assessment of the paydays doesn’t usually bode well for employees at startups. If founders can’t talk to you about this, you probably don’t want to follow them. Most hope you don’t ask the questions and then say things like “What, you don’t believe in the company!” They should be able to sell you on the probability of success, the learning, and everything that will make up for less comp. But don’t let them mislead you about the comp. [1] https://medium.com/the-wtf-economy/what-paul-graham-is-missing-about-inequality-a9f7e1613059#.nazczl5ap https://medium.com/the-wtf-economy/what-paul-graham-is-missi... [2] https://www.google.com/search?q=marissa%20mayer%20compensation&rct=j https://www.google.com/search?q=marissa%20mayer%20compensati... [3] https://bothsidesofthetable.com/is-it-time-for-you-to-earn-or-to-learn-34270acd2f4#.b77utj9vw https://bothsidesofthetable.com/is-it-time-for-you-to-earn-o...
- hibikir 10y ago
  And it gets worse when you consider that there's still a short limit in which you exercise options after you leave, and the company might not go public in a decade. A friend of mine works in one of those unicorn startups, and got about a million dollars worth of options at the current valuation. The strike price is about a third of that price. So if she ever wanted to exercise them before the company goes public, she'd have to pony up over 300K (which she doesn't have) and then deal with the taxes. So even if the payday was real, it still means handcuffs until the company goes public, and companies are taking longer and longer before they go public. So, in practice, regardless of whether her employer will be a successful company in the long run, just being stuck in a job for X number of years before any of that money is real is a big discounting factor. I think this is a big limitation for those very large startups when trying to hire senior engineers: The risk one takes with RSUs is so much lower the risk with options in a company that has no plans to go public in the next couple of years, it makes so much more sense to work for the publicly traded company.
rconti 10y ago
I believe you meant to say "confuse options with stock" as opposed to "misrepresent". And I doubt all that many options holders confuse them. And I strongly suspect that the most common beneficiaries of stock options are not those who make millions off of a unicorn they started working at in the early days, but those who pull in a few tens or hundreds of thousands of dollars from stock options over the years at growth companies. Not every company is trying to time their IPO for the peak of market speculation and then go out of business a year later.
morgante 10y ago
Do you have any stock options? Since they're apparently worth nothing to you, I will buy all your options for $100.
- SeoxyS 10y ago
  Unfortunately, you cannot buy options, only the underlying stock after the option is exercised. It's likely the strike price will be in the thousands for this grant. Also, the company will likely have the right of first refusal on a sale, which means that if $100 is less than what the stock is worth, the company will simply repurchase its own shares. This makes your plan quite a bit complicated and likely impossible to pull off.
  - morgante 10y ago
    Obviously, this was merely a rhetorical point. In reality, various contracts could be put in place such that I provide $100 now in exchange for the rights to any eventual profit from his options.

by cm3 10y ago

dasil003 10y ago

The value of options has nothing to do with unicorn status. If you join an existing unicorn, especially a public company, then your options are no better than a roulette wheel—the valuation already has captured a large amount of savvy knowledge about the future of the company. Also, because it is so big you won't be able to move the needle anyway. The point of options is to take on some risk in exchange for bigger reward. To do this you can't come in with an employee mentality of wanting to get a market salary and have a lot of security, you need to start thinking like a business owner. It's easiest to do this as a founder where you have true control, but it's also possible to do so as an early employee / late co-founder, but in that case you have convince the founders/board of your value. Taking a lower salary in exchange for more equity is a concrete demonstration that you are thinking about the company's burn rate, and that you believe in your ability to help the company succeed. None of this is to justify founder's taking advantage of early employees, by all means stick up for yourself and know your value, but recognize that a computer programmer is not worth $100k a priori, you can spend all your time building things which are worthless. The trick with a company is figuring out how to turn that energy into business value. Founders take on the biggest risk of making that happen, and likewise they get the greatest control. Options with a vesting cliff are the mechanism for realizing that value creation, and rewarding an effort over time. Your ability to succeed with options will certainly be some amount of luck, but to maximize your chances you need an appetite for risk and the desire to build a great company rather than join a great company.

harryh 10y ago

The point of stock options is that they let the owner of said options participate in the success of the company. If the company is very successful, that participation can be quite a lot of money. If the company is not successful or only moderately successful it's unlikely to be much money at all.

cm3 10y ago
Of course, but it's just a bonus like high probability of success when you join a great team with a proven track record. You don't know if the price will be higher/lower and thus it's just that, a bonus at best. If you're expected to take more risks or lower salary, the usual and correct way it to be given a stake of the company.
- harryh 10y ago
  It's not clear to my why you value stock grants so much more highly than stock options. They certainly can be in some circumstances (though in those cases they come with a healthy tax bill), but for early stage-ish startups there generally won't be a huge difference.
  - cm3 10y ago
    A stake in the company means I own part of it, usually 5 or 10 percent at minimum to attract technical talent. Options or stocks are harder to quantify.
  - rrdharan 10y ago
    I imagine you know this but the tax advantages for stock options aren't as clear cut as you make them sound. To make them more compelling than stock grants the options have to be ISOs, the spread on them has to be negligible or zero (to avoid a large AMT bill), the exercise cost has to be low enough that you are ok with handing over that amount of money up front, and you need to be able to actually hold the actual stock for long enough (at least 2 years from date of grant, and 1 year from date of exercise, to be counted as long-term capital gains). Note that on this last point if the company is acquired prior to that date you're likely SOL on the tax advantages. These days I much prefer RSUs. I've twice failed to reap the theoretical tax benefits from ISOs due to acquisition prior to the 2 year window, and I find RSUs much easier to reason about especially once option exercise costs become non-trivial (which is the case if you were to join many of the hot pre-IPO unicorns these days).

tdaltonc 10y ago

Here's one of the points of stock: If you want a stake in a company you have to buy it (it can't just be given to you). A lot of employees don't have the cash on hand to buy stock so companies issue options instead. And even if they did, they'd risk loosing that money. You can't loose money on an option. Here's another: Startups can get in trouble for selling stock to people who aren't 'accredited investor' (basically means "already rich"). This is changing, but it's still a problem.

cm3 10y ago
I've been offered a stake at a privately funded startup for a lower salary and that's reasonable and realistic. Had they offered me options instead I would have walked away sooner than I did. Trading salary for a stake is a gamble, but doing the same for options is like a quadruple mortgage.
- ropiku 10y ago
  The problem with giving outright shares compared to options is you owe taxes on that. In the taxman view you got something (shares valued via 409A) on which you have to pay taxes even if the shares you got are not liquid.
  - jsprogrammer 10y ago
    I don't think becoming an owner is necessarily deferred compensation.
delinka 10y ago
Stock can indeed just be given to you via a "stock grant." The value at the time of the grant constitutes income (for the purposes of income tax calculations in the US.)
cm3 10y ago
I don't think the requirement to buy a stake is the same rule globally. I've heard of people who got a stake just for joining with a lower salary but didn't put money into the company, just their work.

deelowe 10y ago

> What's the point of stock options? I know it's hip with the kids to be cynical these days, but surely you jest... > It's a piece of paper The legal term is "contract." > This price can be higher or lower, you cannot know beforehand. Yep. That's kind of the point. Risk versus reward and all that. > It's not a replacement for a salary or a stake in the company. Not directly, no. Neither is health insurance, 401k, company provided meals or other benefits, but all of these things are perceived by most to have at least some marginal value. > I was handed out stock options myself for a company in the past but it wasn't worth it to use them. C'est la vie > I mean, unless you have options from a unicorn, those don't amount to much. Or, ya know, you end up with a company that has good growth potential and those options work out in your favor, which is actually typically the case btw. On average, the market has improved over time. I'm guessing you were burned either b/c the company was high risk (which means you had the potential to do VERY well conversely) or you were hit by the downturn which also affected almost all stock, so not really related to options in that case. > I have this impression that some misrepresent options with stock Then some are idiots for agreeing to something they don't understand.

cm3 10y ago
> > What's the point of stock options? > > I know it's hip with the kids to be cynical these days, but surely you jest... I've seen so many startups' career pages mention stock options as noteworthy alongside perks. Stock options are like a reservation at a poker table where you're allowed to join the game. > agreeing to something they don't understand it's more likely the bling of a startup overshadowing everything and that it's mostly less experienced and young people.
ryanSrich 10y ago
I agree with everything you said except for this part: > "Not directly, no. Neither is health insurance, 401k, company provided meals or other benefits, but all of these things are perceived by most to have at least some marginal value." Stock options are, 99% of the time, worth $0. Perks, benefits, retirement options, all have intrinsic monetary value.
- 10y ago

maxerickson 10y ago

Options have different tax implications than stock. So for instance, an employee that gets a big pile of options in an illiquid stock doesn't necessarily experience a taxable event. This is good for the employee. If the stock later becomes liquid and worth a lot, the employee can exercise the options and cover any taxes by selling the resulting stock.

Taniwha 10y ago
however if you buy them while they are still valued at the option price you also don't experience a taxable event .... and you can lock in the purchase as a potential capital gain (and possibly pay lower tax when you do sell them) ... the down side is you've invested in something you probably can't get back until when (and if) it goes public. So the time I was a founder and got 100k options at 1c I bought the stock and started the capital gains clock ticking (but then lost the $1k when things crashed and burned). But when I got 10000 options at $1, I didn't buy them for $10k, but made $250k when the company went public -but paid tax at my marginal rate (43% in CA). You have to make choices depending on your circumstances and tolerance for risk

poof131 10y ago

Options are your right to equity or ownership of the company. So you experience some of the upside as well as risk some of the downside. The problem is equity is serving two purposes. On one hand, it represents ownership of the company, the ‘capital’. On the other hand, due to it’s favorable tax treatment, it has become a key component of compensation.[1] Marisa Meyer didn’t start or invest in Yahoo, but she is compensated almost $40m a year in equity, over 90% of her pay package.[2] When you are evaluating an offer between a startup and a larger company, regarding compensation you need to evaluate the whole package: salary, equity, and bonuses. Startups want to compare only salary and over value their equity. “You’re taking a 50% pay cut from Google, but we are giving you XXX in equity at our last valuation.” Look at the total pay packages with more realistic valuations such as a 409a for startups, and then examine the probability of different exits and how much you will make. There’s a reason people say employees are learning while founders are earning.[3] An honest assessment of the paydays doesn’t usually bode well for employees at startups. If founders can’t talk to you about this, you probably don’t want to follow them. Most hope you don’t ask the questions and then say things like “What, you don’t believe in the company!” They should be able to sell you on the probability of success, the learning, and everything that will make up for less comp. But don’t let them mislead you about the comp. [1] https://medium.com/the-wtf-economy/what-paul-graham-is-missing-about-inequality-a9f7e1613059#.nazczl5ap https://medium.com/the-wtf-economy/what-paul-graham-is-missi... [2] https://www.google.com/search?q=marissa%20mayer%20compensation&rct=j https://www.google.com/search?q=marissa%20mayer%20compensati... [3] https://bothsidesofthetable.com/is-it-time-for-you-to-earn-or-to-learn-34270acd2f4#.b77utj9vw https://bothsidesofthetable.com/is-it-time-for-you-to-earn-o...

hibikir 10y ago
And it gets worse when you consider that there's still a short limit in which you exercise options after you leave, and the company might not go public in a decade. A friend of mine works in one of those unicorn startups, and got about a million dollars worth of options at the current valuation. The strike price is about a third of that price. So if she ever wanted to exercise them before the company goes public, she'd have to pony up over 300K (which she doesn't have) and then deal with the taxes. So even if the payday was real, it still means handcuffs until the company goes public, and companies are taking longer and longer before they go public. So, in practice, regardless of whether her employer will be a successful company in the long run, just being stuck in a job for X number of years before any of that money is real is a big discounting factor. I think this is a big limitation for those very large startups when trying to hire senior engineers: The risk one takes with RSUs is so much lower the risk with options in a company that has no plans to go public in the next couple of years, it makes so much more sense to work for the publicly traded company.

rconti 10y ago

I believe you meant to say "confuse options with stock" as opposed to "misrepresent". And I doubt all that many options holders confuse them. And I strongly suspect that the most common beneficiaries of stock options are not those who make millions off of a unicorn they started working at in the early days, but those who pull in a few tens or hundreds of thousands of dollars from stock options over the years at growth companies. Not every company is trying to time their IPO for the peak of market speculation and then go out of business a year later.

morgante 10y ago

Do you have any stock options? Since they're apparently worth nothing to you, I will buy all your options for $100.

SeoxyS 10y ago
Unfortunately, you cannot buy options, only the underlying stock after the option is exercised. It's likely the strike price will be in the thousands for this grant. Also, the company will likely have the right of first refusal on a sale, which means that if $100 is less than what the stock is worth, the company will simply repurchase its own shares. This makes your plan quite a bit complicated and likely impossible to pull off.
- morgante 10y ago
  Obviously, this was merely a rhetorical point. In reality, various contracts could be put in place such that I provide $100 now in exchange for the rights to any eventual profit from his options.