6 ms·

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.
- sheepleherd 10y ago
  you are correct to point out the "flaw" in what s/he said. I don't know the actual answer (and it would be difficult to convince me that anybody has all the data either) but many people "experienced" with startups believe that so many more options come out worthless that cash is strictly better, better expected return at lower risk. however, in the same way that the freakonomics guys explain people playing state lotteries even thought they are "not worth it": state lotteries (and startups) offer some of the few chances that most people have to actually get rich, so even though they don't pay off on average, they are "the only way" and "worth it" to some people. Not claiming that these people have clear ideas about either expected values or risks involved, but they have clear ideas that "it's the only way". For workers at many skill levels, they may have a sense that in their industry they won't be too much worse off in the long run so why not take a shot.
- jessaustin 10y ago
  That's really a moot point, important only from a "risk neutral" standpoint. You've just discovered why risk-averse people don't work for startups.
- Retric 10y ago
  Generally companies hand out options because their expected value is Less than cash. Put another way, they could also just hand out stock instead of stock options.
- bradleyjg 10y ago
  You're assuming a utility function of someone that's either risk adverse or risk neutral. What happens when you plug in a risk seeker?
  - YokoZar 10y ago
    They'd probably be better off with cash and gambling in some other fashion.
- mikeash 10y ago
  The upside is a non-zero chance of becoming filthy rich. Some people are willing to put up with a lower expected value in exchange for that chance. It's a fancy version of the lottery, which many people also play.
  - jsprogrammer 10y ago
    You shouldn't be able to influence a lottery outcome. Presumably, you can influence share prices if you work for a company that you have an ownership claim on.
    - madgar 10y ago
      Do you actually believe that as a non-founding employee you'll be able to make the difference between the company delivering "a life changing amount of money" to employees instead of the far more common outcome? I guess the same type of mind that believes meritocracy really exists could believe such a thing...
      - jsprogrammer 10y ago
        Do you believe companies can accomplish anything they envision, without employees? Or do you think employees are entirely fungible? Does my last employer not have a large contract with Prudential, because of my work?
        madgar 10y ago
        > Or do you think employees are entirely fungible? This is what every self-respecting capitalist believes and knows in their heart. Employees are resources. If a founder doesn't know that they will fail. Maybe you thought startups were an exception and that startup employees are unique snowflakes but BigCo employees are drones? > Does my last employer not have a large contract with Prudential, because of my work? If that contract is what made the business viable, then the company must be completely fucked without you and be on their way to failure. If the contract didn't make a substantial difference in the company's outlook, then how does that relate to my point?
- deleted 10y ago
  [deleted]
- harryh 10y ago
  He's talking about expected value in the probability sense. EV = payout * probability So for cash: EV = 150k (or whatever your salary is) * 100% (it's guaranteed) For equity it might be: EV = 1M * 10% = 100k
shostack 10y ago
This. And things are not really comparable to big finance jobs as the bonus is more or less expected to some degree or people leave to places where they will get the bonus. Startups are a lottery to a large degree, and for employees without significant equity, the odds don't seem great.
- bradleyjg 10y ago
  The finance industry has its own risks. It's a tournament type structure where as long as you stay in the tournament you are doing very well, but if you fall out you can end up doing pretty poorly. Whereas the tech industry, at least for the last several years, has offered a soft landing to many of those that choose to enter the startup lottery and lost. Probably the least risky choice among high paying jobs that exist in reasonably large numbers is to become a doctor.
  - jdmichal 10y ago
    > Probably the least risky choice among high paying jobs that exist in reasonably large numbers is to become a doctor. Though it's likely that your first several years of awesome salary will be spent paying off loans.
  - shostack 10y ago
    Can you elaborate on the "tournament type structure?" Are you referring to those at a high enough level where the expectation is that they source deals? If so, then yes, because at that point it is sales, and if you don't deliver new business, you bomb out, same as any other sales job. If you are low enough level though, that isn't necessarily a concern since you aren't expected to source deals.
    - bradleyjg 10y ago
      In the investment banking industry you can't be a lifetime associate, it is up or out. If you make it to managing director you are doing very very well for yourself, but you still don't have any job security. That big pay packet is a ripe target when fortunes turn and the bank needs to cut costs. And if you get let go as an MD it is unlikely you will find another bank to take you in (the usual thing where it is harder to find a job without a job is even more so in the financial world.) There's also a technical meaning to tournament theory that helps explain why firms in some industries are so structured. You can read more about that here: http://www.econ.ucsb.edu/~pjkuhn/Ec250A/Slides/Tournaments&Teams.pdf http://www.econ.ucsb.edu/~pjkuhn/Ec250A/Slides/Tournaments&T...

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.
sheepleherd 10y ago
you are correct to point out the "flaw" in what s/he said. I don't know the actual answer (and it would be difficult to convince me that anybody has all the data either) but many people "experienced" with startups believe that so many more options come out worthless that cash is strictly better, better expected return at lower risk. however, in the same way that the freakonomics guys explain people playing state lotteries even thought they are "not worth it": state lotteries (and startups) offer some of the few chances that most people have to actually get rich, so even though they don't pay off on average, they are "the only way" and "worth it" to some people. Not claiming that these people have clear ideas about either expected values or risks involved, but they have clear ideas that "it's the only way". For workers at many skill levels, they may have a sense that in their industry they won't be too much worse off in the long run so why not take a shot.
jessaustin 10y ago
That's really a moot point, important only from a "risk neutral" standpoint. You've just discovered why risk-averse people don't work for startups.
Retric 10y ago
Generally companies hand out options because their expected value is Less than cash. Put another way, they could also just hand out stock instead of stock options.
bradleyjg 10y ago
You're assuming a utility function of someone that's either risk adverse or risk neutral. What happens when you plug in a risk seeker?
- YokoZar 10y ago
  They'd probably be better off with cash and gambling in some other fashion.
mikeash 10y ago
The upside is a non-zero chance of becoming filthy rich. Some people are willing to put up with a lower expected value in exchange for that chance. It's a fancy version of the lottery, which many people also play.
- jsprogrammer 10y ago
  You shouldn't be able to influence a lottery outcome. Presumably, you can influence share prices if you work for a company that you have an ownership claim on.
  - madgar 10y ago
    Do you actually believe that as a non-founding employee you'll be able to make the difference between the company delivering "a life changing amount of money" to employees instead of the far more common outcome? I guess the same type of mind that believes meritocracy really exists could believe such a thing...
    - jsprogrammer 10y ago
      Do you believe companies can accomplish anything they envision, without employees? Or do you think employees are entirely fungible? Does my last employer not have a large contract with Prudential, because of my work?
      - madgar 10y ago
        > Or do you think employees are entirely fungible? This is what every self-respecting capitalist believes and knows in their heart. Employees are resources. If a founder doesn't know that they will fail. Maybe you thought startups were an exception and that startup employees are unique snowflakes but BigCo employees are drones? > Does my last employer not have a large contract with Prudential, because of my work? If that contract is what made the business viable, then the company must be completely fucked without you and be on their way to failure. If the contract didn't make a substantial difference in the company's outlook, then how does that relate to my point?
deleted 10y ago
[deleted]
harryh 10y ago
He's talking about expected value in the probability sense. EV = payout * probability So for cash: EV = 150k (or whatever your salary is) * 100% (it's guaranteed) For equity it might be: EV = 1M * 10% = 100k

shostack 10y ago

This. And things are not really comparable to big finance jobs as the bonus is more or less expected to some degree or people leave to places where they will get the bonus. Startups are a lottery to a large degree, and for employees without significant equity, the odds don't seem great.

bradleyjg 10y ago
The finance industry has its own risks. It's a tournament type structure where as long as you stay in the tournament you are doing very well, but if you fall out you can end up doing pretty poorly. Whereas the tech industry, at least for the last several years, has offered a soft landing to many of those that choose to enter the startup lottery and lost. Probably the least risky choice among high paying jobs that exist in reasonably large numbers is to become a doctor.
- jdmichal 10y ago
  > Probably the least risky choice among high paying jobs that exist in reasonably large numbers is to become a doctor. Though it's likely that your first several years of awesome salary will be spent paying off loans.
- shostack 10y ago
  Can you elaborate on the "tournament type structure?" Are you referring to those at a high enough level where the expectation is that they source deals? If so, then yes, because at that point it is sales, and if you don't deliver new business, you bomb out, same as any other sales job. If you are low enough level though, that isn't necessarily a concern since you aren't expected to source deals.
  - bradleyjg 10y ago
    In the investment banking industry you can't be a lifetime associate, it is up or out. If you make it to managing director you are doing very very well for yourself, but you still don't have any job security. That big pay packet is a ripe target when fortunes turn and the bank needs to cut costs. And if you get let go as an MD it is unlikely you will find another bank to take you in (the usual thing where it is harder to find a job without a job is even more so in the financial world.) There's also a technical meaning to tournament theory that helps explain why firms in some industries are so structured. You can read more about that here: http://www.econ.ucsb.edu/~pjkuhn/Ec250A/Slides/Tournaments&Teams.pdf http://www.econ.ucsb.edu/~pjkuhn/Ec250A/Slides/Tournaments&T...