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It's interesting to see the popular response to this thread being one where people think employees are better off with salary over options. This seems crazy to

• EpicEng 10y ago
  >including Google, Yelp, Apple and Pandora So, companies that exist in that tiny portion which are actually hugely profitable? Most companies aren't, and most options are worth little to nothing at the end of the day. After a decade in start ups and now supporting a family, I'll always take salary over options.
• marssaxman 10y ago
  My experience has been that you never get enough influence over the company's success to make a significant difference, and the options don't pay off frequently enough to rely on. For my own part, I've been at this for over 20 years and I've never come close to making any significant amount of money from options. They have lost all incentive power. Pay me cash money now, and I'll invest it however I please.
• thisone 10y ago
  you've had no close friends who've lost their options, or had their options become worthless when companies fail? You're one lucky person to know!
  • shon 10y ago
    Of course I have seen people lose. I've personally lost on options as well. I didn't make the assertion that you can't lose. With options, you are betting that the company will not fail and that it will become much more valuable. Both are statistically unlikely. You are also betting that you won't leave or be otherwise eliminated before the exit. Mainly I'm framing this in comparison to additional salary which is also unlikely to generate significant wealth unless you are very good or very lucky (Probobally both) at managing your money.
    • mikeash 10y ago
      How much is needed for something to qualify as "significant wealth"? You seem to be dismissing differences in salary as unimportant, so it's fine to take a pay cut in exchange for even a small chance at significant wealth, because that's all that matters. Let's say the salary difference is $50,000/year. Over 20 years, that's maybe half a million dollars, post tax, that you gain by ditching options. Maybe that's not significant to you, but it seems to me to be a pretty rational decision to prefer a relatively certain half million dollars over a low chance of some substantially higher payout.
      • shon 10y ago
        In my experience the salary difference isn't usually that large. Sometimes it is, and some companies do pay unusually low salaries in exchange for options, obviously increasing risk, perhaps to an undesirable level. I'm CEO and co-founder of a funded company. We pay competitive salaries + options. I don't begrudge someone who isn't interested in options. Options are actually expensive to me. We are still fairly early stage (Series A funded) so the founders own most of the company and the option pool primarily dilutes the founders. I want to give options to someone who wants them. I'm fine paying more salary in lieu of of options. I think of options like a profit-sharing plan in a mature company. If the company does very well then the employees should share in that success. Some folks feel that paying very low salaries and heavy options breeds loyalty. I personally don't subscribe to that. I prefer to pay something competitive and have options as nice upside for the employee.
• bradleyjg 10y ago
  Going the cash route has a higher expected value but a lower variance. Different people have different attitudes towards risk.
  • landryraccoon 10y ago
    I think you mean lower expected value, no? The way you put it cash is strictly better in every way than options - both higher expectation and lower risk. According to you there's no upside to options relative to cash.
    • jonknee 10y ago
      No, having your options be worth a lot is a very rare event. That's why they hand them out instead of giving you more money.
      • bjacokes 10y ago
        The main reason that options are handed out is to compensate for below-market salaries, and the main reason salaries are below market is that the company wants to increase its runway. Some specific valuations or offers warrant cynicism, but remember that any startup with negative cash flow (even successful ones with near-market salaries) should be giving out equity to keep their salaries costs down.
        • jonknee 10y ago
          Yes, but most of these companies fail and the options thus worthless. I mean it's great when it works out, but like lottery tickets they usually aren't worth the paper they are printed on.
          • bjacokes 10y ago
            Right: startups give out options, and those options are likely to be worthless. Your previous comment, however, was also suggesting causation: startups give out options because they are likely to be worthless. That's certainly not the entire reason. Like I said, a startup doesn't want to pay market salary because it would effectively ~halve their cash runway versus shifting compensation towards equity.
• conistonwater 10y ago
  Having a significant portion of your portfolio in options on one company, which also happens to be the company you work for, is overconcentrated. The usual (good) advice is that people should diversify their portfolio, and believing in your company is not a good reason to not do that. Maybe it'd help to think about it in reverse: if you had all your money in cash, would you then buy all those options in your company to get the same portfolio? (Note: perhaps you would, but it's generally considered to be a bad idea.)
  • tibbon 10y ago
    Would perhaps the best advice there to be exercise your options at every company you work at for all that you're vested for? If you worked for 5 companies in 10 years, then you've got 50% of your options (likely) at each of those companies. Seems a decent-ish diversity.
• justinlardinois 10y ago
  Are you talking about options being the entirety of one's financial compensation? Because I wonder how people who work without a salary manage to pay the bills every month. > the tax on W2 income is simply the worst As opposed to getting taxed on what you eventually make from your options?
  • khuey 10y ago
    The maximum federal tax rate on what "you eventually make from your options" is likely 23.8%, whereas on the equivalent salary it'd be 43.4%.
    • deleted 10y ago
      [deleted]
    • sokoloff 10y ago
      It's hard to get substantial sums of money from options and have it all be taxable only at LTCG rates. ISOs are limited to $100K/yr when first exercisable and doing an 83b election (assuming your plan permits it) on unvested shares is fairly risky, to put it mildly. Yes, it's possible to get such tax rates, but generally only for amounts under $100K.
• FussyZeus 10y ago
  This is like someone winning the lottery then telling you to liquidate your retirement fund and buy powerball tickets. Yeah, if you worked for Google back in the day, you could actually do this. Now? With the crowded landscape of tech companies competing to provide services, except for the few services who have one or MAYBE two companies that completely own the field? You'd be insane to take options.
• rdtsc 10y ago
  > I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash) I have watched friends get paid a smaller salary, hoping for a great exit only to find their options diluated or the company just simply failing. Now you probably only have lucky and successful friends or that friends who didn't get enough cash to buy a house are probably not in the back of your mind, as nobody wants to advertise either their failure or failure of their friends. It just get chucked to "oh well, startups are risky". But then the winner get famous and everyone talks about them, making it seem like joining a startup and accepting options instead of a good salary is a sure way to succeed. Notice, this is the same process the lottery system uses. We make fun of those people, but it is the same idea. Lottery always havily publicizes their winners, that is not just random marketing but a very useful tactic -- make everyone believe they can win took -- "Look at him, they got a huge giant check, so can you". If they televised ever single lottery loser, nobody would buy the tickets.
  • rezlov 10y ago
    That's the name of the game. You take a risk to make big money, and sometimes that risk doesn't pay off.
    • JohnTHaller 10y ago
      *Most of the time in the case of startups
    • draw_down 10y ago
      Different people have different ideas on the value of "sometimes" in that sentence :)
    • rhizome 10y ago
      Or you start working for a company thinking their product(s) are cool, strong and survivable as its own thing, and then it turns out the plan was not to build a business but to cash out.
      • 10y ago
• Retric 10y ago
  A single person making 100k+ has a ~90% chance of saving enough in 10 years to retire in a cheap location. That is a life changing amount of money.
  • turnip1979 10y ago
    Not if you live in the Bay area. Definitely not if you have to support a family.
    • Retric 10y ago
      Many "single people" in the Bay area make less than 40k/year. They don't starve. If you are single, living in the bay, and making 100+k and not saving like a bandit it's because that's your choice.
      • aioprisan 10y ago
        I don't know what housing costs you must be talking about then. $40k/year pre-tax is close to $2648/month after state and federal taxes, and you're saying that with Bay area housing prices, you're not starving? I'm guessing that's also with no school loans or trying to work and pay your way through school, which probably applies to a very small fraction of the population.
        • imtringued 10y ago
          >which probably applies to a very small fraction of the population. If you consider Walmart and McDonalds employees then that's a large part of the us population.
        • dpark 10y ago
          It's easy. You just live in a small 2-bedroom apartment with 3 other people. $40K goes a long way if you're willing to have no space to yourself.
  • mathgeek 10y ago
    That's a great bet if you ignore the possibility of not being single your entire life.
• logicallee 10y ago
  I would like to point out that there is a practical third option given that some people say "Pay Employees A Market Salary", whereas some companies may not yet be able to afford it. In practice when you're a technical founder (or cofounder with one), you might have three fantastic people you can't afford, great technical roles. They'd do great work for 40 hours per week, they believe in your vision and you, because your vision has a competitive advantage they can execute well with, and you can essentially generate equity value out of thin air together. They cost way less than the amount of value that could be generated, so they make sense from a business investment perspective. But the company just might not have the funds yet. So, besides giving out options as compensation, or giving out a market salary, the third, practical alternative, is not to hire any of the three persons, but instead work for 130 hours per week doing their 3 jobs and your job, and sleep 5.4 hours per day. This divides to 32.5 hours per "job" (130 / (3+1)). In practice by not hiring these great engineers, you've also not hired their coffee breaks, lunches, not hired the time they spend reading Hacker News, reading about new technologies, trying various stuff such as a new framework they'd like to try, you've not hired the time they spend writing documentation or any kind of testing whatsoever, and you've not hired any downtime they spend waiting for anything whatsoever. In fact, with these concessions, the 130 hours turns out to be an exaggeration. So, some people call the results of this "technical debt", which is a bit of a misnomer. It's a misnomer because if the project doesn't start generating value, you can kill it and nobody has to clean up anything. So in this sense, rather than a "technical debt" - it's more of a technical option. Instead of generating employee stock options, you've created technical stock options, where if the technical results actually make it rain, then at that point the project is investable, people can be hired for a market salary, and they can rewrite all the code that you've optioned. In this very real sense it really is an option, rather than debt. So, in practice a lot of silicon valley seems to work this way. A lot of successful people have succeeded using more or less this formula. We've all heard lots of stories of seasoned developers being brought on to clean up spaghetti code written by a founder or cofounder, that proved the business case but was hideous, poorly documented, structured, tested, with even security and backup policies and redundancy policies making it a miracle that nothing melted down. So when one wonders why some founders work so much - well, this is the reason. The people who could have written all this properly from the start, weren't available given the finances the company had at the time. Often other people aren't willing to share the vision, and if you want something built, regardless of its value, at times you just have to do it - before anyone has funded you. So this is a very real third possibility that many people do not realize really is a kind of "option". An essay on this is here: http://higherorderlogic.com/2010/07/bad-code-isnt-technical-debt-its-an-unhedged-call-option/ http://higherorderlogic.com/2010/07/bad-code-isnt-technical-...
• powera 10y ago
  If you assume that you will be screwed out of your equity, it makes sense to be compensated entirely with cash up front. And with companies like Uber that seem to plan to never have an IPO, and also this meme that it's good to screw ex-employees out of their vested shares, it's not necessarily an unreasonable assumption.
• morgante 10y ago
  > But if you're going to have to invest anyway, why not work for a company you believe in and have a chance at influencing the company's success as well as your own? For one thing, it's fiscally unsound to have the majority of your net worth and your salary tied to a single investment.
• bogomipz 10y ago
  That you have four close friends who have made significant windfalls is a bit of an anomaly. There are far more people that have lost on that gamble(trading salary for options) than there are that have won. Give it another ten years of working at startups and it won't look so crazy. I'm mot even sure how you "optimize for gaining a "life changing amount of money"? That's like saying you are going to optimize for luck. There a substantial amount of luck involved in seriously "cashing out" on a startup.
• kriro 10y ago
  The idea of taking higher salary over options is basically summed up in the "why your dentist is rich" chapter in Fooled by Randomness. It's "safer" and you'll be relatively rich over all outcomes. Additionally you can theoretically invest the extra money over your vesting period of the options at whatever $insert ETF produces as an annual return. Setting all the monetary issues asside I'm not sure if I'd prefer more money or more options on a philosophical basis. I feel like I'd go for options because if you work at a startup you should share the vision and work there because you believe it's awesome stuff that will change the world. OTOH taking the salary might make you less prone to certain biases and more "objective" in everyday work (+not overinvested in one outcome). tl;dr: I think I'd take the options package if I'd work at a startup because if I wouldn't I'd have to question why I work there in the first place