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When it comes to stock options, HN has taught me two things: 1. They are worthless, as >90% startups fail and you won't be getting anything in that case. 2. I

When it comes to stock options, HN has taught me two things: 1. They are worthless, as >90% startups fail and you won't be getting anything in that case. 2. If they are not worthless, you might not be able to afford paying for them anyway [1]. Add to that how difficult it is to get a simple, clear answer to the question "how do I invest my money?". So yes, I wouldn't be surprised if most people didn't know how stock options work. [1] https://news.ycombinator.com/item?id=10811570 https://news.ycombinator.com/item?id=10811570

patio11 10y ago
I feel like I've matured on this question over the years, so to caveat #1: 90% of options are worth nothing if you count by companies granting, but probably 90% of options are worth something if you count by people receiving grants. How does that work? Because companies which grow and become worth something hire a metric ton of people and give all of them options. If you're of the opinion that most engineers in San Francisco work for a seed stage startup, you're just straight up not correct. It only seems that way because of availability bias. Thus the reason for this comment: it's very, very dangerous to get people in our industry thinking "options are ipso-facto worthless" when our industry builds packages for substantially all engineers where they're a material portion of one's compensation. You can find all-cash offers out there, particularly from non-tech employers of engineers, but the standard in our industry is cash plus a substantial equity component, and (as someone in the industry) you really, really need to have a deeper understanding of equity than "all equity is worth zero." Though the capitalist in me says "If one really thinks that all equity is worth zero, you will find many people willing to take yours off your hands at pennies on the dollar once that becomes feasible for your company."
- kasey_junk 10y ago
  > you will find many people willing to take yours off your hands at pennies on the dollar once that becomes feasible for your company If this were true options would be a lot more valuable. But it turns out by the time a company gets to the point where there is any liquidity for their options, that company has probably passed the inflection point where you are past your 90% mark and it is obvious that it is so. Due to the way option agreements are structured (right of first refusal, exercise time limits, etc) its virtually impossible to sell non-public options for employees who do not wait out a liquidity event (which is another downside to options that companies seem to discount too much).
smallnamespace 10y ago
Easier said than done, but you if there's any likelihood at all of success, you should make damn sure you have cash on hand to exercise. Otherwise, you are literally losing a winning lottery ticket for want of pocket change.
logfromblammo 10y ago
Even though anecdotally, I have made some money on option grants, I now see them as a symptom of cargo-cult management practices. A few weeks ago, a co-worker asked me for advice about a new (to us) employee stock purchase plan, and I basically said, "don't shit where you eat." Messing around with your employer's stock isn't a wonderful idea. Most people should just be blindly investing x% of their income in a robot-managed index fund. Fewer people should also be investing in only those businesses they understand well enough to independently analyze. And if I were in any position to really analyze the financials of my employer, well, now I'm subject to insider trading gotchas. But as a peon-level employee of a company, I am always in the very first group of people to be lied to whenever anything goes wrong. Everything is fine. Continue working as usual. Don't worry about office shutdowns and massive layoffs. I'd always tend to overvalue my employer's stock (or frantically shotgun resumes to other potential employers). For the purposes of incentivizing better productivity, the company could be adding cash bonuses to my paycheck. It's very simple, and great for my morale (barring memberships in the Jelly-of-the-Month Club, Sparky). My current company has done it a few times. When you hide the "extra free money" behind a stock-shuffling scheme, it makes me think you're up to something sneaky. Also, I don't consider it wise to be heavily invested in the company that is my primary source of ordinary income. Think of it this way: would/could you buy the option/stock on the open market if the company wasn't offering it up in the conference room? I wouldn't. Only if I were already 100% financially secure otherwise would I ever invest in my employer directly. And guess what? 100% financially secure means that I can quit, right now, and not have an employer, freeing me to invest in whatever damned-fool thing I want. If you're taking financial advice from random people on the Internet, the only place you should be investing is robot-managed index funds, and not doing anything on the side until after you have already maxed out your 401(k) contributions. So I basically value options as "this company would rather generate massive amounts of additional paperwork and hassle than just give me an equivalent value in cash bonuses."
- smallnamespace 10y ago
  To play devil's advocate though, you are being provided more information than the external market would be by virtue of being an employee of a company, and also someone working in the industry, etc. Having more information at your disposal to evaluate a company means that option grant is worth more to you than to a random person on the street, which is why the company will pay you in options. It's better for the company, since they would rather sell equity to you than to a random person, and it's better for you, because you are an informed investor and know more than just from reading balance sheets. That said, IMO you should basically only work at a startup that you think will be successful. Given that, you should buy as much equity as you can afford to. From a financial perspective, working at a startup then not taking equity is just throwing away a big chunk of informational efficiency. If you just want a cash paycheck, go work at a big company instead.
xutopia 10y ago
Then you have limbo... worth a lot on paper but no liquidity events planned.

patio11 10y ago

I feel like I've matured on this question over the years, so to caveat #1: 90% of options are worth nothing if you count by companies granting, but probably 90% of options are worth something if you count by people receiving grants. How does that work? Because companies which grow and become worth something hire a metric ton of people and give all of them options. If you're of the opinion that most engineers in San Francisco work for a seed stage startup, you're just straight up not correct. It only seems that way because of availability bias. Thus the reason for this comment: it's very, very dangerous to get people in our industry thinking "options are ipso-facto worthless" when our industry builds packages for substantially all engineers where they're a material portion of one's compensation. You can find all-cash offers out there, particularly from non-tech employers of engineers, but the standard in our industry is cash plus a substantial equity component, and (as someone in the industry) you really, really need to have a deeper understanding of equity than "all equity is worth zero." Though the capitalist in me says "If one really thinks that all equity is worth zero, you will find many people willing to take yours off your hands at pennies on the dollar once that becomes feasible for your company."

kasey_junk 10y ago
> you will find many people willing to take yours off your hands at pennies on the dollar once that becomes feasible for your company If this were true options would be a lot more valuable. But it turns out by the time a company gets to the point where there is any liquidity for their options, that company has probably passed the inflection point where you are past your 90% mark and it is obvious that it is so. Due to the way option agreements are structured (right of first refusal, exercise time limits, etc) its virtually impossible to sell non-public options for employees who do not wait out a liquidity event (which is another downside to options that companies seem to discount too much).

smallnamespace 10y ago

Easier said than done, but you if there's any likelihood at all of success, you should make damn sure you have cash on hand to exercise. Otherwise, you are literally losing a winning lottery ticket for want of pocket change.

logfromblammo 10y ago

Even though anecdotally, I have made some money on option grants, I now see them as a symptom of cargo-cult management practices. A few weeks ago, a co-worker asked me for advice about a new (to us) employee stock purchase plan, and I basically said, "don't shit where you eat." Messing around with your employer's stock isn't a wonderful idea. Most people should just be blindly investing x% of their income in a robot-managed index fund. Fewer people should also be investing in only those businesses they understand well enough to independently analyze. And if I were in any position to really analyze the financials of my employer, well, now I'm subject to insider trading gotchas. But as a peon-level employee of a company, I am always in the very first group of people to be lied to whenever anything goes wrong. Everything is fine. Continue working as usual. Don't worry about office shutdowns and massive layoffs. I'd always tend to overvalue my employer's stock (or frantically shotgun resumes to other potential employers). For the purposes of incentivizing better productivity, the company could be adding cash bonuses to my paycheck. It's very simple, and great for my morale (barring memberships in the Jelly-of-the-Month Club, Sparky). My current company has done it a few times. When you hide the "extra free money" behind a stock-shuffling scheme, it makes me think you're up to something sneaky. Also, I don't consider it wise to be heavily invested in the company that is my primary source of ordinary income. Think of it this way: would/could you buy the option/stock on the open market if the company wasn't offering it up in the conference room? I wouldn't. Only if I were already 100% financially secure otherwise would I ever invest in my employer directly. And guess what? 100% financially secure means that I can quit, right now, and not have an employer, freeing me to invest in whatever damned-fool thing I want. If you're taking financial advice from random people on the Internet, the only place you should be investing is robot-managed index funds, and not doing anything on the side until after you have already maxed out your 401(k) contributions. So I basically value options as "this company would rather generate massive amounts of additional paperwork and hassle than just give me an equivalent value in cash bonuses."

smallnamespace 10y ago
To play devil's advocate though, you are being provided more information than the external market would be by virtue of being an employee of a company, and also someone working in the industry, etc. Having more information at your disposal to evaluate a company means that option grant is worth more to you than to a random person on the street, which is why the company will pay you in options. It's better for the company, since they would rather sell equity to you than to a random person, and it's better for you, because you are an informed investor and know more than just from reading balance sheets. That said, IMO you should basically only work at a startup that you think will be successful. Given that, you should buy as much equity as you can afford to. From a financial perspective, working at a startup then not taking equity is just throwing away a big chunk of informational efficiency. If you just want a cash paycheck, go work at a big company instead.

xutopia 10y ago

Then you have limbo... worth a lot on paper but no liquidity events planned.