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Valuing stock options at zero is one of those HN memes that are repeated endlessly, mostly, I suspect, by people not from Silicon Valley who know few, if any, e

Valuing stock options at zero is one of those HN memes that are repeated endlessly, mostly, I suspect, by people not from Silicon Valley who know few, if any, engineers who got rich from stock options. Just because stock options should be valued at less than a company's private valuation does not mean they are worth 0. Very few engineers actually value them at zero. Adding on to this comment: It's a spectrum, not a black and white your options are worth zero dictum. At one end, (extremely early stage startup, < 5 employees, you're not a founder) your options are probably worthless, sure, although you have a minuscule chance of being worth $10M+. At the other extreme, you join a company that everyone knows is going to go IPO within two years, and essentially earn what you would earn at Google or Facebook, maybe slightly more. To give you one example, I knew someone that made about a million (vested over 4 years) in options by joining an already-successful startup as engineer ~70, that he believed would IPO within 4 years. On top of his market rate salary.

danielweber 10y ago
It should be valued at 0 unless the company takes active steps to encourage you not to, which would include answering dozens of questions about vesting and dilution that they won't.
- argonaut 10y ago
  This makes no sense. Any vesting details will be detailed right in your contract. Dilution depends on the company's fundraising in the future, you are essentially asking them to bring out a crystal ball and tell you exactly what their IPO/fundraising plans are. It's up to you to estimate how much you think you will get diluted, based on the type of company and how much they've raised so far.
  - danielweber 10y ago
    I've been in the room where the CEO said, in not so many words, "fuck the former employees who exercised their options. They aren't here." No one gives a shit. Sometimes it works out well. You also won't be told when they take on a funding round with priority, even though all their prior rounds were funding with no priority. Personally experienced that one. If the industry wants employees to value their options above zero, give the employees legal protection that would enable them to do so. Otherwise it's VC firms getting butthurt that people aren't accepting their scrip as real money.
    - argonaut 10y ago
      You won't be told about funding rounds if your contract doesn't mention it. Like I said, any details you desire should go in the contract.
      - danielweber 10y ago
        Yes, the standard contract is completely opaque to the employee, and they don't have the specialized knowledge required to understand it. And the company sure isn't going to help you. So value the funny-money at 0. If the industry wants to change this perception, then there should be a widespread standardization on a contract that is fair to the employees and it should be easy for employees to understand any diffs from that standard.
        argonaut 10y ago
        If a contract is opaque to you, you get a lawyer to look it over. End of story. If you sign a contract that is opaque to you, without talking to a lawyer or at least someone knowledgeable (e.g. personal friends that are senior engineers that have talked to lawyers), you only have yourself to blame, not Silicon Valley. It goes without saying that I've rarely found the contracts I've signed to be opaque.
        wpietri 10y ago
        I find this sort of burden-shifting abhorrent. It's the company who will spend thousand or tens of thousands of dollars having the contract made. It's the company who gets to amortize the costs of a complicated contract over many hiring interactions. It's the company who has the advantage of a strong information and experience asymmetry. In short, the company has a lot more power. If somebody with power screws somebody without, I save most of my blame for the people who set things up.
        argonaut 10y ago
        Sure. But none of your perfectly valid comment changes the fact that if you are clueless about a contract, you should either talk to a lawyer (or otherwise someone knowledgeable) or decline to sign it. It goes without saying that employment contracts all use the same language, I have never personally run into a clause I found opaque or confusing.
  - jc4p 10y ago
    I think one of the points Adam repeatedly mentions in the article is that a contract in itself isn't really transparent. I get exactly what you are saying, it makes logical sense from the perspective of someone who knows what's going on, but in all of these discussions my thoughts are on the young naive person signing up for a deal they don't fully understand. I think stock options should be valued at zero. In an a-will employment state you, and with a typical contract, you can get fired at any random day and if you don't have enough money to exercise your vested options within 90 days, they're gone. I don't consider that reliable. In regards to the parent comment of yours, I think if it was stated as "proactively answer" vs "answer" it'd be less arguable.
    - argonaut 10y ago
      None of that justifies valuing them at zero. Even if those reasons were valid, those reasons would maybe justify taking the official private valuation and cutting it by 75%.
guelo 10y ago
Would you estimate the percentage of Web 2.0 Silicon Valley engineers that have been able to cash out anything significant (let's say > 1 year market salary) at greater than .1%?
- argonaut 10y ago
  Yes, because you are ignoring the fact that most engineers that make money off stock options are doing so at well-established startups that haven't gone IPO yet. Companies like Airbnb, etc. 4 years ago, everyone knew Airbnb, Pinterest, etc., would be successful.
  - aaronbrethorst 10y ago
    Kind of like how everyone knew Evernote would be successful four years ago? Or Gilt? Or Dropbox? Or Fab? Or Foursquare?
    - argonaut 10y ago
      The only companies whose options are worth 0 (zero) in your example are Gilt and Fab. Evernote and Foursquare are still around - your options are worth less than their private valuations if you joined 4 years ago, but they are not worth 0, even after dilution. Foursquare is still a $650M company. And only in some twisted world is Dropbox not a success. They're a friggin multi-billion dollar company even if they aren't a 50 billion dollar company (the horror). I also didn't say you're going to have a 100% stock option hit rate for companies that are pre-IPO. You are still taking on risk. But your hit rate is going to be a lot higher. It's also rather telling that these are among the worst examples of pre-IPO tech companies you can think of.
      - aaronbrethorst 10y ago
        > It's also rather telling that these are among the worst examples of pre-IPO tech companies you can think of. Nah, just the first ones that came to mind. Theranos is another good one I should've mentioned.

danielweber 10y ago

It should be valued at 0 unless the company takes active steps to encourage you not to, which would include answering dozens of questions about vesting and dilution that they won't.

argonaut 10y ago
This makes no sense. Any vesting details will be detailed right in your contract. Dilution depends on the company's fundraising in the future, you are essentially asking them to bring out a crystal ball and tell you exactly what their IPO/fundraising plans are. It's up to you to estimate how much you think you will get diluted, based on the type of company and how much they've raised so far.
- danielweber 10y ago
  I've been in the room where the CEO said, in not so many words, "fuck the former employees who exercised their options. They aren't here." No one gives a shit. Sometimes it works out well. You also won't be told when they take on a funding round with priority, even though all their prior rounds were funding with no priority. Personally experienced that one. If the industry wants employees to value their options above zero, give the employees legal protection that would enable them to do so. Otherwise it's VC firms getting butthurt that people aren't accepting their scrip as real money.
  - argonaut 10y ago
    You won't be told about funding rounds if your contract doesn't mention it. Like I said, any details you desire should go in the contract.
    - danielweber 10y ago
      Yes, the standard contract is completely opaque to the employee, and they don't have the specialized knowledge required to understand it. And the company sure isn't going to help you. So value the funny-money at 0. If the industry wants to change this perception, then there should be a widespread standardization on a contract that is fair to the employees and it should be easy for employees to understand any diffs from that standard.
      - argonaut 10y ago
        If a contract is opaque to you, you get a lawyer to look it over. End of story. If you sign a contract that is opaque to you, without talking to a lawyer or at least someone knowledgeable (e.g. personal friends that are senior engineers that have talked to lawyers), you only have yourself to blame, not Silicon Valley. It goes without saying that I've rarely found the contracts I've signed to be opaque.
        wpietri 10y ago
        I find this sort of burden-shifting abhorrent. It's the company who will spend thousand or tens of thousands of dollars having the contract made. It's the company who gets to amortize the costs of a complicated contract over many hiring interactions. It's the company who has the advantage of a strong information and experience asymmetry. In short, the company has a lot more power. If somebody with power screws somebody without, I save most of my blame for the people who set things up.
        argonaut 10y ago
        Sure. But none of your perfectly valid comment changes the fact that if you are clueless about a contract, you should either talk to a lawyer (or otherwise someone knowledgeable) or decline to sign it. It goes without saying that employment contracts all use the same language, I have never personally run into a clause I found opaque or confusing.
- jc4p 10y ago
  I think one of the points Adam repeatedly mentions in the article is that a contract in itself isn't really transparent. I get exactly what you are saying, it makes logical sense from the perspective of someone who knows what's going on, but in all of these discussions my thoughts are on the young naive person signing up for a deal they don't fully understand. I think stock options should be valued at zero. In an a-will employment state you, and with a typical contract, you can get fired at any random day and if you don't have enough money to exercise your vested options within 90 days, they're gone. I don't consider that reliable. In regards to the parent comment of yours, I think if it was stated as "proactively answer" vs "answer" it'd be less arguable.
  - argonaut 10y ago
    None of that justifies valuing them at zero. Even if those reasons were valid, those reasons would maybe justify taking the official private valuation and cutting it by 75%.

guelo 10y ago

Would you estimate the percentage of Web 2.0 Silicon Valley engineers that have been able to cash out anything significant (let's say > 1 year market salary) at greater than .1%?

argonaut 10y ago
Yes, because you are ignoring the fact that most engineers that make money off stock options are doing so at well-established startups that haven't gone IPO yet. Companies like Airbnb, etc. 4 years ago, everyone knew Airbnb, Pinterest, etc., would be successful.
- aaronbrethorst 10y ago
  Kind of like how everyone knew Evernote would be successful four years ago? Or Gilt? Or Dropbox? Or Fab? Or Foursquare?
  - argonaut 10y ago
    The only companies whose options are worth 0 (zero) in your example are Gilt and Fab. Evernote and Foursquare are still around - your options are worth less than their private valuations if you joined 4 years ago, but they are not worth 0, even after dilution. Foursquare is still a $650M company. And only in some twisted world is Dropbox not a success. They're a friggin multi-billion dollar company even if they aren't a 50 billion dollar company (the horror). I also didn't say you're going to have a 100% stock option hit rate for companies that are pre-IPO. You are still taking on risk. But your hit rate is going to be a lot higher. It's also rather telling that these are among the worst examples of pre-IPO tech companies you can think of.
    - aaronbrethorst 10y ago
      > It's also rather telling that these are among the worst examples of pre-IPO tech companies you can think of. Nah, just the first ones that came to mind. Theranos is another good one I should've mentioned.