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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

by 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.
- rrdharan 10y ago
  Not to mention that options can, and do, go underwater at which point they're worthless. I would argue that an option to buy stock at a $15 strike is worth a lot less than 1/16th of a single RSU when the company's current FMV is say, $16, if the company is still private, especially given current market conditions.
- poof131 10y ago
  You make a great point. I probably wouldn't work for a startup that doesn't extend the exercise period. Fortunately, people are pushing for this and I think it is great for employees. [1, 2] Strong signal that the company thinks about you. 1. http://blog.triplebyte.com/extending-stock-option-exercise-window-guide http://blog.triplebyte.com/extending-stock-option-exercise-w... 2. http://blog.samaltman.com/employee-equity http://blog.samaltman.com/employee-equity

by poof131 10y ago

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.

rrdharan 10y ago
Not to mention that options can, and do, go underwater at which point they're worthless. I would argue that an option to buy stock at a $15 strike is worth a lot less than 1/16th of a single RSU when the company's current FMV is say, $16, if the company is still private, especially given current market conditions.
poof131 10y ago
You make a great point. I probably wouldn't work for a startup that doesn't extend the exercise period. Fortunately, people are pushing for this and I think it is great for employees. [1, 2] Strong signal that the company thinks about you. 1. http://blog.triplebyte.com/extending-stock-option-exercise-window-guide http://blog.triplebyte.com/extending-stock-option-exercise-w... 2. http://blog.samaltman.com/employee-equity http://blog.samaltman.com/employee-equity